An Inflation Scare Fades Away in the US

Article excerpt

THE better price statistics for May that came out this week and last were no real surprise to economists.

"We could not see how a combination of slow growth and small wage increases could result in a pickup in the fundamental rate of inflation," says Edward Campbell, chief economist at Brown Brothers Harriman & Co., a New York investment bank.

For the first four months of this year, consumer prices rose at an annual rate of 4.3 percent, well ahead of the 2.9-percent rate in the same months last year. Gold prices also moved up from about $327 an ounce in early March to approximately $382 by mid-May - a trend often seen as indicating more inflation.

Some officials at the Federal Reserve Board got excited, leaking reports that the central bank's policymaking Open Market Committee had, in its instructions to chairman Alan Greenspan, called for a bias toward higher short-term interest rates. That prompted the bond and stock markets to have a short fit. Prices fell sharply. And the White House, after a meeting between President Clinton and Mr. Greenspan June 9, issued a statement saying, "there are no inflationary pressures on the economy" that would warrant an increase in interest rates.

"The administration reacted in a measured way," Paul Kasriel, an economist with Northern Trust Company, Chicago, says approvingly.

A keen Fed watcher, Mr. Kasriel says that a majority of Fed policymakers do not want to raise interest rates but have biased the policy directive to placate a couple of inflation "hawks" on the Fed Board of Governors, Wayne Angell and Lawrence Lindsey. He adds:"The Fed used a bit of open-mouth policy rather than open-market policy to signal the markets it was concerned about inflation."

Dr. Campbell says something similar: The Fed was "positioning itself" so it couldn't be criticized if the May inflation numbers continued at a high annual rate.

The May numbers eased inflation fears. Many economists are patting themselves on the back about their foresight. Campbell had forecast a 0.1-percent increase in the consumer price index (CPI). That's what the actual statistics showed.

The consensus forecast by some 50 economists compiled by Blue Chip Economic Indicators has the CPI rising 3. …