Why inflation is absent at economic banquet
Inflation, the great economic bogeyman of the 1970s and 1980s, has taken a powder in the late 1990s.
Nobody's sure where it's gone. Some of the conditions for its reappearance exist: a booming economy, low unemployment, and strong consumer demand. But rising prices remain as elusive as Sasquatch. The consumer price index (CPI) was up only a modest 0.3 percent in August, the Labor Department said yesterday.
This quiescence may be due to many factors, from the rapid spread of computers, to the rise of price-cutting warehouse stores, and cheap imports from Asia's staggered economies.
"Basically we have a much more open market economy, a global economy where the option to raise prices remains limited," says Murray Weidenbaum, head of the Center for the Study for American Business at Washington University in St. Louis.
It would be naive to think that inflation is now a thing of the past, like the Ford Pinto, or the Ford administration. Federal Reserve Board officials need to be wary of its reappearance, say experts, for the simple reason that it is easiest to combat before it is clearly visible.
Some economists remain convinced that it is about to leap upon us. They predict that the Fed will raise interest rates again this October 5 in an effort to keep prices in check, despite the low August CPI figures. Strong consumer demand, they say, is bound to lead to a price uptick. And retail sales surged more strongly than expected in August, up 1.2 percent, the Commerce Dept. said this week.
"I've seen prices of things going up around here - Dunkin' Donuts just raised their prices for example.... I wouldn't be surprised to see it jump up and bite us," says Cynthia Latta, an economist at Standard & Poor's DRI in Lexington, Mass.
Others aren't so sure. The volatile energy sector was a big driver of last month's 0.3 percent rise, they point out. Take this and food prices out of the mix, and the so-called "core" inflation rate was up only 0.1 percent.
Over the last 12 months the core rate is 1.9 percent, within what most experts consider the Fed's economic targets.
"I certainly don't think the Fed will raise rates on October 5," says Richard Yamarone, an economist at Argus Research in New York.
Mr. Yamarone and others point out that the Fed, in recent months, appears to have changed some of its fundamental views about how the US economy works. This has led the nation's central bank to let the economy run hotter than it might have in the 1980s.
True, the Fed has already raised rates this year in an effort to douse business activity a little. But Fed governors did not act until the unemployment rate had fallen to a 30-year low of 4.2 percent. Six percent used to be the unemployment rate at which the Fed would swing into action, concerned that tight labor markets would send wages, and then prices, marching up and up.
Fed chairman Alan Greenspan has talked often in recent months about how worker productivity has been enhanced by the spread of information technology. Businesses are able to operate more efficiently, keeping inventories lower, for instance, because real-time computer information allows them to judge what their customer base wants.
Such changes mean that upward wage pressures are not quite the inflation spring they used to be.
"The American economy ... is in the grip of what the eminent Harvard professor Joseph Schumpeter many years ago called 'creative destruction', the continuous process by which emerging technologies push out the old," said Greenspan in a speech last week.
Almost by definition, the absence of inflation means that the Fed has done its job well in recent months and years.
In New Zealand, some politicians have even talked recently about hiring Alan Greenspan for their own nation - particularly after they discovered that he is paid less than his New Zealand counterpart.
But other government actions have helped contribute to inflation's absence and the general strong economy, others note.
Wall Street is still rubbing its eyes at the federal budget surplus, the product of fiscal deals between the White House and the GOP-led Congress. The administration has pushed for global trade, and made homeownership easier for those with lower incomes.
"A number of different fiscal and monetary policies have played a part in this success," says Mark Zandi, an economist at Regional Financial Associates in West Chester, PA.
*Staff writer Mark Trumbull in Boston contributed to this report.
(c) Copyright 1999. The Christian Science Publishing Society