Inflation suspected of lurking among spring fashions Economists differ on clothing markup

March 24, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Is it just the price of clothing, or is inflation really coming back into fashion?

All but gone a few months ago, inflation might be making a slow comeback, causing an earlier-than-expected rise in interest rates and setting back the Clinton administration's economic plan.

The economic community is far from unanimous in warning about higher inflation. Many argue that the recent figures are just a seasonal blip that can be explained away as a freak rise in clothing prices.

But many analysts believe that rosy forecasts of a slowing rate of inflation have been all but discredited. With that, they warn, mortgage rates could again be on the rise, and business profits could sink as borrowing becomes more expensive.

"One thing is clear. The best of inflation news is behind us," said James Grant, editor of Grant's Interest Rate Observer.

Inflation has become a topic again because of two consecutive strong rises in the Consumer Price Index, a leading indicator of inflation.

Last year, inflation averaged 3 percent, and many economists predicted that it would fall down closer to 2.5 percent this year. Now, many are not so sure.

"The latest numbers put the burden of proof on those who said inflation would decline," said David Jones, an economist with Aubrey G. Lanston & Co., a government securities trading company in New York.

In January, it rose 0.5 percent, representing an annual rate of 6 percent. And last month, it increased 0.3 percent, though what economists consider the "core rate" -- stripped of volatile energy and food prices -- was up another 0.5 percent.

According to Mr. Jones, a combination of the current economic growth, the Federal Reserve Board's low-interest rate policy and the Clinton administration's push to increase regulation is helping to boost inflation at least to last year's level. The expanded government oversight, such as environmental rules covering lumbering, increase business costs, which then get passed on in higher prices.

Signs that inflation worries are returning can be seen in the currency markets, as the dollar remained flat in recent weeks despite a cut in German interest rates and turmoil in Russia, which traditionally would have boosted the greenback. To many analysts, this shows that foreigners remain unwilling to buy U.S. dollars because they think the Fed is not independent enough to take the politically unpopular steps necessary to control inflation.

"We've got a lot of politics going on with the Fed. It's like personal diplomacy to save their necks," Mr. Jones said.

Part of the reason for the Fed's actions, he said, is that it is trying to save itself from greater congressional oversight. By falling in line with the government, the reasoning goes, the Fed hopes to turn back legislation that would strengthen government control over the central bank.

Others also point to Fed Chairman Alan Greenspan's endorsement of President Clinton's deficit-reduction plan, despite its call for a $16 billion economic stimulus package, which many consider inflationary.

The Fed's Open Market Committee, which meets every six weeks to set monetary policy, met yesterday and, though the meeting was held in private, most observers believe it would not lead to a change in interest rates.

But if the inflation figures continue to come out high, the Fed might be forced to prove its independence by early summer and raise interest rates. If that happens, the White House can be expected to criticize such action for slowing economic growth, and congressional regulators would likely cite it as an example of the Fed's excessive inflation-fighting zeal, Mr. Jones said.

Other economists, however, believe this scenario to be too pessimistic, and they discount recent signals of inflation.

"The increases have more to do with the new spring apparel lines than any real increase in inflation," said Debbie Johnson, an economist with C. J. Lawrence Inc.

The reason, according to this argument, is that the main gauge of inflation is heavily influenced by apparel costs, which increased greatly during the early part of the year. This made the overall rate look stronger than it really is, said A. Gary Shilling, a private economic adviser based in New Jersey.

In addition, labor costs continue to be low, and companies continue to downsize, which dampens worker demands for inflationary wage increases, Mr. Shilling said.

"When people are getting fired left and right, your zeal for a wage increase diminishes," Mr. Shilling said.

And though the Clinton administration's program might be inflationary, this would likely be offset by the tax increases that will drag down economic growth and dampen inflation, Mr. Shilling said.

Both sides agree, however, that interest rates will have to rise this year. And even if the Fed holds out longer than many think prudent, any increase is bound to draw criticism from the White House, which would prefer low rates to spur growth. "Either way, the Fed is in for a tough time," Mr. Shilling said.

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