Why Are Economists Worried about Inflation

THE JOURNAL RECORD, July 7, 1993 | Go to article overview

Why Are Economists Worried about Inflation


Blue-chip corporations from Sears to IBM are sending out pink slips by the sackful, leaving millions of qualified workers sifting the want ads for employment. Whole industries, from airlines to cigarettes to computers, are hemorrhaging cash in a struggle to attract price-conscious consumers. Why, then, are economists worried about inflation?

One answer is that many are not.

"You are looking at a global economy with lots of excess capacity," said Van Doorn Ooms, the director of research at the Committee for Economic Development. "It's difficult to see inflation on the horizon."

But a surprising number of economists, representing a variety of schools of thought, do have an inflation itch that they cannot scratch. And Tuesday, many investors joined them as an index of commodity prices surged, rekindling inflation fears.

These on-again, off-again anxieties are reflected by the Federal Reserve, whose divided governors are apparently hoping that tough anti-inflationary talk will obviate the need for action. Indeed, it is hard to remember a time when so many economists are of two minds on so basic an issue.

Start with the case for what is probably the majority view: that, for the moment, inflation is not a serious concern. Rising prices are a byproduct of scarcity, of too much demand chasing too little supply. This hardly fits the current market for labor: With 7 percent unemployment and this year's high school and college graduates scrambling for jobs, there is no discernible upward pressure on wages.

Nor, for that matter, is scarcity a problem in production. While a handful of prominent industries _ notably steel and lumber _ are operating near capacity, most are not. In fact, chronic overcapacity plagues businesses ranging from airlines to publishing to telecommunications. And even where American companies are beginning to fill their order books, foreign competition generally deters them from raising prices.

True, the rising value of the yen relative to the dollar has made it more expensive for Japanese companies to manufacture for the American market. And the resulting increases in Japanese car prices have been mirrored in higher prices for Detroit's models. But anecdotal evidence of import-driven inflation is misleading.

While computer simulation models do indeed suggest that a 10 percent rise in the exchange value of foreign currencies would increase Americans' overall cost of living by roughly three-tenths of a percent, the impact of the yen's appreciation has been negligible because it has been fully offset by the depreciation of the currencies of America's other trade partners. According to Morgan Guaranty Trust, a dollar actually bought more abroad in April 1993 than it did a year earlier.

In other words, Toyota prices may be going up, but the prices of Mercedes-Benzes and just about everything else imported from the rest of the world are going down.

"You'd have to look beyond the computer models" to link price pressures to currency fluctuations, concludes Mark Lasky, a senior economist at DRI Inc. in Lexington, Mass.

That, however, is not the end of the story. Textbook analysis just doesn't seem to apply to current economic conditions. Consider the erratic course of economic growth and price increases in recent months. While the rate of economic growth was a tepid 1 percent in the first quarter of 1993, down sharply from the previous three months, the inflation rate inched up to nearly 4 percent. The inflation figures for April and May were back down to a reassuring 1.7 percent rate, but those who look hard enough can still spot some inflation straws in the wind.

Edward Yardeni, the chief economist at C.J. Lawrence, notes that gold prices rose to a two-year high last week and Tuesday the Commodity Research Bureau index of 21 leading commodities surged on news of soybean crop damage and gains in other basics. …

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