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Is US inflation licked? It depends on pickup at home - and abroad

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Many aspects of the current US economic expansion are a puzzlement. None perhaps more than questioning how long today's relative price stability will continue. Moreover, the questions come from both sides. Will the credit demands of an aging recovery and a still huge federal deficit combine to bring back inflation? Or will worldwide recovery be relatively weak, bringing on an era of deflation?

During July the consumer price index rose by 0.3 percent, slightly more than the 0.2 percent increase of June. We're getting accustomed to hearing these picayune figures. As recently as 1980, the inflation rate for the year was 12.4 percent.

In the year since last July, prices have risen about 4 percent. They are currently rising at 3.5 percent yearly rate, in spite of the hefty business expansion under way for a year and a half. If the perception grows that inflation has really been licked, the bond market would have a field day. Yields well above 12 percent are far higher than the return an investor traditionally requires from such a safe investment. Yet the fact that yields are at that level indicates there are a lot of folks out there who are still unconvinced about inflation.

One factor keeping the US inflation rate low has been the overvalued dollar. This has had an effect in at least two ways. First, relatively cheap imported goods have been strong competition for domestically produced goods and have acted as a brake on domestic price increases. This is at least suggested in a breakdown of the July numbers. The consumer price index for services, which by their nature are domestically provided, rose 0.7 percent. The price of commodities was unchanged. By the time a business expansion is as mature as this one, the cost of goods in the CPI might be expected to be rising. At the very least, the pressure from imports seems to be helping.

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