No one's afraid of inflation, except Alan Greenspan

June 02, 1999|By Robert Reno

IT HAS been seven years since inflation exceeded 3 percent and 18 years since it reached double-digit levels.

Inflation has lost its capacity to scare Americans. Time has wiped from memory those dreadful years from roughly 1966 to 1990, when inflation wiped out the wage gains of an entire generation, traumatized the nation's politics and brought down foreign governments with alarming frequency.

Wall Street, where memories can be notoriously short, hasn't taken inflation seriously for years. But it does take the Federal Reserve seriously, and it has reacted sullenly to the Fed's announcement that it has shifted from a neutral position on inflation to one of guarded belligerency, which assumes that rising prices are now a greater danger than recession.

While the Fed took no overt action to raise interest rates recently, its warning was enough to send the Dow into a 194-point one-day tailspin and provoke a market nervousness that extended into last week.

All this had to do with an unexpectedly large one-month rise in the consumer price index. The CPI rose 0.7 percent in April, the biggest increase in nine years. Is this enough to justify a fit of hysterics and does the Fed's reaction constitute an irrational exuberance for a new war on inflation?

Coming up for air

To begin with, anything that causes this stock market to take a breathing spell can be helpful if only to contain its rather hysterical recent tendency to overprice itself.

This is a much better argument for the Fed's caution than any real danger that inflation is about to take off. After more than 100 months of relatively stable prices, it is plain silly to seriously risk a recession based on a single month's performance.

Looking closer at the April data, the chief culprits seem to be apparel, cigarettes and oil. Now, nobody is expecting a global shortage of clothes and shoes. The April figures can easily be dismissed as a fluke.

Tobacco is more expensive for obvious reasons: It is the government's policy to drive up the price, and the tobacco companies boost prices to keep profitably milking a shrinking base of smokers.

Oil prices

As for consumer energy prices, the huge 6.1 percent increase measured in April merely reflects the major oil exporters' February decision to limit production. But oil prices have started falling in recent days, reflecting cheating by individual members of the OPEC cartel and soft world demand. OPEC's capacity to control world prices simply isn't what it used to be.

True, prices of medical care and pharmaceuticals seem to be poised to take off again this year and next but medical inflation has always had a life of its own, discrete from the overall inflationary process.

Better than looking at one month's price levels, we might take a peek at the comfortable amount of excess capacity in American industry. This idle capacity is a safeguard against the kind of shortages of goods that ignite price increases. Industry was operating at about 80 percent of capacity in April, down sharply from peak levels in 1998.

With trade unions on the defensive, technology opening up broad new vistas of lower costs and higher productivity, farmers distressed by depressed prices, Europe and East Asia in a period of slack and the disinflationary effects of increased globalization, it takes a paranoid frame of mind to imagine anything like the confluence of events that produced the inflationary firestorm of the 1970s and 1980s.

The best we can hope is that the monetary grandees at the Federal Reserve understand this perfectly well, that they have used this occasion to lay a benign and calming hand on the stock market and that they aren't serious about a new war on inflation. Anyway, nothing succeeds like taking on a straw man.

Robert Reno is a Newsday columnist.

Pub Date: 6/02/99

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