Some predict new surge in US inflation. Money supply climb causes concern, but most economists see stable rate
Economist Lawrence Kudlow may feel something like the bored shepherd boy who falsely cried ``wolf.'' Last year about this time he was forecasting an onslaught of inflation by year-end 1984. It didn't happen. Again, the former chief economist of the Office of Management and Budget is crying ``inflation'' -- a 6 or even 7 percent annual rate by the end of this year.
The majority of economists, including top Treasury officials, are more sanguine on inflation. ``Rumors of reaccelerating inflation . . . appear exaggerated,'' says a report by Data Resources Inc., a Lexington, Mass., consulting firm. The consensus forecast runs around 4 percent for this year, about what it has been running for the last few months. Most economists expect the pressures from high unemployment and slack industrial capacity to continue restraining wage and price increase.
A minority of economists, however, particularly monetarists -- who believe the money supply is the prime force behind the economy -- are sounding the alarm again. Citibank economist Alan Murray, also a monetarist in inclination, talks of 5 to 5.5 percent inflation by year-end. ``It [the alarm] is for real this time,'' he says.
Today's release of the producer price index for April may raise some fresh concern for inflation. The index has moved up very little over the past six months and in fact declined slightly in February. A few economists have been predicting a substantial boost this time, an increase that would eventually have an effect on consumer prices. ``There was a pickup in energy prices,'' noted Karen DiEmma, whose firm, CM&M Group, has forecast a tripling of the 0.2 percent rise in March to 0.6 percent in April.
The key reason for inflation concern by the monetarist economists is the rapid growth of the nation's money supply. M-1 (checking accounts plus currency in circulation) has grown at a speedy 10.6 percent annual rate since last October.
Irwin L. Kellner, an economist with Manufacturers Hanover, warns that ``any further increase in the rate of growth of money could very well revive inflation and the expectation of inflation -- something the Fed [Federal Reserve System] has fought long and hard to damp down over the past five years.''
One of the most proven of all economic theses is that a rapid creation of money, if continued long enough, will eventually result in faster inflation. The usual lag is a year or two.
It was an earlier burst of money creation by the Federal Reserve System that prompted last year's forecasts of renewed inflation. ``Special factors suspended the linkage but didn't break it,'' says Mr. Kudlow, now an economic consultant in Washington. ``We weren't wrong; we were a little early.''
Three such factors, according to monetarists, are:
1. The Fed reduced the growth of money to zero from June to October. That had not been expected by the monetarists. It countered the inflationary effect of the earlier rapid growth in money.
2. The US dollar grew much stronger on foreign-exchange markets, partly because of the slower money growth. This not only held down or reduced the price of imports, it also put pressure on domestic producers to restrain their prices.
3. World commodity prices, including oil, were weak in the second half of last year, perhaps again partly because of US monetary restraint.
Now, however, these factors are reversing and, thus, inflationary pressures are rising once more. The monetarist economists note that money growth is rapid, the dollar has weakened, and commodity prices are starting to rise again.
Indeed, Kudlow sees renewed inflation as ``the biggest threat to economic expansion.'' Peter Crawford, another economist at Citibank, agrees, saying: ``Much higher inflation would absorb a large fraction of each dollar of added spending, thereby repressing real growth, and inflation probably would drive the monetary authorities to severely restrictive policies.''
Top Treasury officials, it is understood, expect inflation to remain steady or, at worst, creep up slowly. They are more concerned about the possibility of a slowdown in the economy -- which could result in more unemployment, higher budget deficits, and harm to world economic recovery.
Contrariwise, Kudlow and Citibank economists have pointed out that in the past, inflation has sometimes surged suddenly ahead within a few months. They fear this could happen again. And they expect the economy to bounce back solidly from its poor performance in the first quarter, when gross national product rose at only a 1.3 percent annual rate, but the ``implicit price deflator'' -- the broadest measure of inflation -- rose at a 5.3 percent annual rate.
They already see some signs of inflationary pressure:
In March, the consumer price index rose at a 5.8 percent annual rate (but up only 3.7 percent for the 12 months to March).
Prices of services have increased 5.1 percent over the past 12 months. Kudlow sees a pattern of acceleration in this sector, which accounts for 48 percent of the consumer price index (CPI).
Excluding food and energy, the CPI has risen 5.1 percent over the past year.
The steep decline in energy prices, according to Kudlow, has run its course.
Unit labor costs in the business sector rose at a 7.8 percent rate in the first quarter, and even in manufacturing alone at a 5.1 percent annual rate. Citibank's Mr. Murray does not expect these costs to rise at such a rapid rate this year as the economy picks up steam and productivity rises again rather than falling (down 1.2 percent in that first quarter). Nonetheless, he says, that inflationary factor ``puts us on notice.''
In February a group of 14 prominent economists, former politicians, and former secretaries of the Treasury, calling themselves the Committee to Fight Inflation, saw a serious danger that inflation might accelerate again. The bipartisan group, headed by Henry H. Fowler, a former Treasury secretary, and Herbert Stein, a former chairman of the Council of Economic Advisers, warned against a stimulative monetary policy, more protectionism, and doing nothing about the budget deficit.
Most economists, though, do not expect inflation to surge. Typically, Allen Sinai, of Shearson Lehman Brothers, says, ``There is little to fear on inflation over the next few months.'' After that, because of a weaker dollar, he expects a ``more permanent, though still modest, acceleration of inflation.''