Inflation Is Only as Real as We Imagine

November 08, 1994|By ROBERT RENO

The financial markets were having a renewed case of the inflation willies last week.

You've already heard all the tediously orthodox reasons why a price explosion may be just around the corner from the good-news-is-bad-news crowd at the Federal Reserve and elsewhere.

So I guess it's time to give you a revised and updated list of sound reasons why it's silly to be alarmed about inflation in the present economic climate.

* Even the current, relatively modest inflation rate is substantially overstated. Reason: The government's consumer-price index is not catching fast-changing patterns in consumer buying habits and improved product quality. Many economists feel this adds a full percentage point to the most widely watched price indicator.

* Pressure from employment costs, an essential ingredient of uncontrolled inflation, simply isn't there. In the 12 months ending September 30, wages and benefits rose just 3.2 percent, the smallest increase on record. Labor costs typically account for 70 percent of the costs of production.

* Organized labor is in a funk. In the third quarter, pay gains provided in new contracts averaged just 0.9 percent for the first year, 1.9 percent over the life of the contracts. The weakness of labor was confirmed by the failure of its legislative agenda in the expiring session of Congress.

* Price increases in medical care, the most inflationary sector during the 1970s and '80s, are moderating as managed care spreads and the industry reacts warily to the possibility of government-enforced reform.

* Fears that U.S. factories are operating too close to capacity are exaggerated. Leaner, meaner manufacturers are squeezing more out of increasingly efficient plants. Besides, with exports increasingly feeding the American market there is plenty of excess foreign capacity to cancel out U.S. capacity-driven price pressures.

* Consumer confidence, measured by the Conference Board's highly regarded survey, has been falling now for four months, hardly a performance that suggests a consumer-driven boom that is likely to overheat. The board's index of buying plans declined steeply in October.

* There is good evidence that U.S. consumers have become fundamentally more price-resistant, meaning more and more companies simply can't make price increases stick. This is something of a sea change from the inflationary culture of the 1970s that tended to dominate behavior into the 1980s.

* Successive increases in interest rates in the last year are likely to put the brakes on the housing sector where barometers of future activity indicate that higher mortgage rates -- and decreasing housing affordability -- will make themselves felt in the coming months.

I could go on. But the prevailing inflationary jitters on Wall Street suggest that Federal Reserve Chairman Alan Greenspan is, whatever you think of his skills as a central banker, an incomparable salesman for his notions that an inflationary spiral is just waiting to break out. The longer the monthly price indexes prove him wrong, the more the markets seem convinced he's right.

Robert Reno is a columnist for Newsday.

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