Specter of inflation haunts the economy

September 27, 1994|By John E. Woodruff | John E. Woodruff,Sun Staff Writer

Wall Street has been fretting that new signs of rising prices may drive the Federal Reserve to boost interest rates again today. But if America has an inflation problem, you can't find it by visiting your nearest car dealer.

"Our prices overall have actually inched down a bit. The Taurus is in its annual race with Honda for the No. 1-selling car in the country, and Ford has put on a $750 rebate, which brings the price down substantially," says Bernard J. Finan, general sales manager for Archway Ford Inc.

Given this kind of price restraint -- found not only in the nation's showrooms but also on retailers' shelves -- why are economists asking these days only when the Fed will raise rates and not whether the Fed will raise rates?

In fact, virtually all agree that the Fed will add at least another half-point to the federal funds rate, which banks charge each other for overnight loans, by the end of the year. The Fed boosted the rate a half-point, to 4.75 percent, at its Aug. 16 meeting and hinted broadly that it wanted to let that level ride for a few months.

Further, prices of gold and other commodities have continued to surge since then, and last week brought news that industrial production had surged 0.7 percent in August, far beyond private economists' forecasts.

In response, Wall Street's inflation jitters drove long-term interest rates up and the Dow Jones industrials average down by more than 100 points last week. The Dow reclaimed 17.49 of those points yesterday to close at 3,849.24.

What drove securities down was the fear that unexpectedly strong economic performance in August might prod an unwilling Fed into raising short-term rates, for the sixth time since February, at today's regularly scheduled meeting.

Yet, going into today's meeting, economists are more divided than usual about when to expect the next bump.

A few say today could be the day. Many say the most the committee will do is authorize Fed chairman Alan Greenspan to act on his own if he sees the need between now and the committee's next regularly scheduled meeting in November. Others say there will be no action before the November meeting, by which time the Fed will have had its first look at comprehensive figures for the third quarter.

Behind those differences lie questions about how far and how fast the inflation bulge is moving through the production process, and how soon and how hard it will hit the consumer.

Commodities prices, many of which are up more than 20 percent since the first of the year, "stand at the very earliest stage in the production process and account for a relatively small part of total production costs by the time an item reaches the consumer," said Daniel Friel, vice president and senior economic analyst at NationsBank.

In the meantime, though, many manufacturers and retailers are holding the line on retail prices of many goods, especially big-ticket items, economists say.

Companies remain worried they would lose sales if they tried to make still-wary consumers pick up the rapidly rising tab for metals, chemicals and other industrial commodities that go into the products, they said.

The price on a 1995 Ford Taurus sedan, for example, is up only about 2.5 percent, well under the current inflation rate. "They felt they had to work to keep the new prices under control if they wanted people to accept it," Mr. Finan said.

This price pressure has translated into some of the country's best-sustained inflation figures in more than a decade.

Consumer prices rose at a 2.9-percent annual rate for the first eight months of this year and 2.7 percent for all of 1993.

One reason is that a large part of the price the consumer pays is labor costs, which are advancing far more slowly.

"The manufacturing sector is booming, but the boom is productivity-led. At [at annual rate of] 2.8 percent, wage inflation remains very low. Unit labor costs are falling throughout the manufacturing sector," said Ed Yardeni said chief economist of C. J. Lawrence Deutsche Bank Securities.

Most economists expect inflation to accelerate, but moderately, into 1995.

"The anecdotal evidence is that some producers are able to pass on the commodities price increases a little bit now, and that probably means we are not too far away from seeing some of that reach the consumer, which will speed up inflation, but only a bit," NationsBank's Mr. Friel said.

Further down the road, economists are looking at a new inflation threat, as Europe's and Japan's economies begin to feed on the U.S. expansion.

"With the U.S. industrial capacity utilization nearing its peak, synchronized global growth will start to use up spare capacity in industrial Europe and eventually Japan. Now subdued, inflationary pressures will inevitably build up as the global economic revival takes hold," Roger M. Kubarych, manager of Henry Kaufman & Company, Inc., said last week in a speech to the Canadian American Committee of the National Planning Association.

As those pressures develop, Mr. Kaufman expects the Fed to raise short-term interest rates by more than two additional percentage points before the current expansion runs out of steam.

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