Share this story
Close X
Switch to Desktop Site

Inflation may be down but it's hardly out, especially in services

THE consumer price index for the past three months would lead one to conclude that inflation is dead. But is it? An elderly reader out in California -- I don't know if she wears tennis shoes, but she is certainly on her toes -- writes me occasionally to list the prices of goods she buys that have increased recently. Her point is that the increases are never 2 or 3 percent. They're more like 10 or 20 percent.

This was brought home to me over the Memorial Day weekend, when to the surprise of my family, I came home with several quarts of hand-packed ice cream. (The size of our household had grown for the long weekend!) The surprise to me was that since the Christmas holidays, the last time I had stopped at this same gourmet shop, the price had gone up from $4 to $4.40 a quart -- a neat 10 percent increase.

About these ads

While worldwide competition has limited the ability of corporations to raise prices (at least as long as the dollar was high), the service sector has continued to experience some inflation. And goods produced and marketed locally also fall into the category of items that don't get buffeted by foreign competitors.

David Wendell, an investment counselor in Bath, Maine, writes an astute investment letter for his clients. In the most recent issue, he goes into the causes of inflation. The root case, he notes, goes back to overspending by government. This results either in higher taxes, which consumers and businesses try to compensate for by demanding higher wages and prices, or in the creation of too much government debt.

In the latter situation, so much of the debt gets monetized that the increased money supply in turn causes inflation. The monetarists, of course, would claim that it is the monetization of the debt that is the cause of inflation. But Mr. Wendell is more nearly correct in saying that it is growth in government spending, since the public and the politicians acquiesce in or even demand the monetization of the debt.

Now, what is most encouraging is that since 1982 the total government sector hasn't been growing any faster than the private. If one takes the longer, 1947-75 period, private-sector spending grew at an average annual rate of 6.3 percent, while government at all levels increased its spending at an annual rate of 9.5 percent. Since 1982, the growth of both private and government spending has been equal -- about an 8 percent annual increase. Wendell concludes that ``the long established trend toward bigger and bigger government has been muted in recent years -- thus alleviating the most powerful inflationary force.''

Wendell notes that the 1946 dollar -- the year after World War II ended -- is now worth only 18 cents. And that's just with an average inflation rate over the postwar period of 4.5 percent.

One reason many local prices keep going up may simply be that consumers are not used to resisting price increases. There may still need to be a couple of years of price stability before it becomes difficult to tack an increment onto yesterday's price.

And it's still possible that general inflation is not finished. Certainly the increase in some auto sticker prices which took place after the dollar's decline had raised the dollar price of Japanese cars does not augur well for what a declining dollar may say about inflation.

About these ads

From 1955 to 1975, total government spending increased from a level representing 32 percent of private-sector spending to 52 percent. And today it has edged up somewhat more, to 54 percent. If we want to even approach lasting price stability, containing and even turning back the tide of big government still remains a high priority -- and is definitely unfinished business.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.