A Wall Street economist sees double-digit blues
Sam I. Nakagama is pessimistic about inflation, and that's not good news. The Kidder, Peabody & Co. economist has an exceptionally accurate record in forecasting the level of inflation.
Back in 1977 when most economists were talking about a 4 to 6 percent rise in the consumer price index for the year ahead, Mr. Nakagama was warning that it would climb 9 percent. It did. In 1975, the average economist was predicting continued high inflation after the shock of 12.2 percent in 1974. Mr. Nakagama said it would decline to 4.5 to 5.5 percent. The actual increase in 1976 in the index was 4.8 percent.
Today Mr. Nakagama is forecasting that prices will go up 12 or 13 percent between July of this year and July of 1981. "The American economy is now heading into a period of extreme tension," he says.
Again the Wall Street economist is out of line with the consensus forecast of perhaps 10 percent.
Mr. Nakagama blames two international developments for the present situation:
* The failure of the Soviet grain crop, coinciding with a large order for grain from China, and the impact of drought and low points in the beef, hog, and poultry cycles in the United States.
* The shutdown of oil production in Iran and Iraq as a result of their war.
Mr. Nakagama is highly critical of the "apparent attempt" of President Carter to provide the Khomeini regime with arms and the return of its frozen assets in return for the hostages before Tuesday's elections, on grounds it might prolong the war and the cutoff of oil.
Already, he notes, the spot price for oil has risen to about $37.50 a barrel, from $30 before the outbreak of the war. Since the OPEC nations do not like to see middlemen reaping huge profits on their oil, they could soon decide once more to shove up their official contract prices for petroleum.
As for the various meat animals, Mr. Nakagama points out that starting out from a low point in the so-called "beef cycle," the expansion of the nation's cattle herd has been hurt by the drought's effect on feed crops. Farmers have been marketing steers and cows off the range because of poor forage conditions. That means the cattle slaughter next spring could be smaller than expected. Feed Cattle prices have already risen from around $60 per hundredweight in early April to just under $70 now. Mr. Nakagama predicts the price will be $80 to $ 100 by mid-1981.
Further, he says, the price of wheat is likely to hit $6 a bushel sometime next year, vs. $4 last spring; corn, $4.50 vs. $2.60; and soybeans, $13 vs. $6.
All this adds up to "another price explosion," he says, perhaps adding two or three percentage points to the rate of inflation by next spring.
"It is hard to underestimate the unfortunate consequences of the China grain deal," he goes on. ". . . the Carter administration is seen by grain farmers as making an election-year ploy to appease them to offset the unpopularity to the embargo against the Soviets. In doing so, however, the administration is elbowing its way ahead of Canada and Australia in the China market. By engaging in a state-to- state deal with China, the administration is taking a giant step toward government control of grain trading in this country.It is also adding upward pressures to food prices at a time when the cost of eating is beginning to soar."
Leif Olsen, chief economist for Citibank in New York, also sees the possibility of the consumer price index rising by as much as 12 or 13 percent next year. But he believes the index distorts the true effect of inflation on personal consumption. That's because when prices of certain products rise, people cut back their purchases of those products or buy substitutes. The index remains based on amounts purchased by the average consumer in 1972- 73.
For instance, the rise in the price of gasoline has brought about a sharp decrease in the amount bought.
However, Mr. Olsen does expect the gross national product deflator -- the broadest measure of prices -- to rise from the third quarter's 9 percent level to about 10 percent in the next two quarters before easing off once more.Oil price increases, he adds, have had a minor effect on this most comprehensive measure of inflation -- no more than 1 to 2 percent. That's much less than the Carter administration would like voters to believe.
The problem with more rapid inflation is that it probably means less real growth in the economy.
Whoever the new president is, he will face uncomfortable economic difficulties.