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. …