Low Inflation Makes Business Earn Growth

John F. Lawrence is The Times' economic affairs editor

As the economy continues in its mid-recovery stall, economists ponder its curious behavior. But among the many explanations they come up with, one seems nearly always omitted: the lack of renewed inflation.

Could it be that some of today's caution on the part of business simply reflects inexperience in operating under relatively stable prices? At having to make money the hard way?

One of the more remarkable aspects of this recovery has been the durability of the price restraint. By this time in recent economic upswings, prices already were racing upward at an accelerating pace.

In a way, that made things easy. Even as companies complained about rising costs, they were able to hide a lot of problems behind what the MBA wizards have come to call "aggressive pricing." Put simply, aggressive pricing means getting all you can out of the customer. Oftentimes, however, it also means substituting higher prices for honest progress.

Have a profit goal you suddenly can't meet? Raise the price. It was all very convenient. Most people in those days expected higher prices anyway, so resistance often was slight.

Matters Have Changed

Alas, today, matters have changed. Raise a price and just possibly lose the business. In many industries, it's more a buyer's market, and buyers aren't so worried the price will go up if they don't buy now. Fact is, it may go down.

The change imposes a lot more discipline on corporate leaders. Any wonder, then, that business life to many of them seems a lot more uncertain?

The manifestations of this uncertainty come in many shapes. They can be seen in far tougher wage negotiations because management isn't so sanguine about recouping higher costs. They show up in cost cutting at a time in a recovery when companies often have worried more about boosting volume at any cost. Hence, business inventories are relatively slim and have been falling. Layoffs are uncommonly frequent for such a period.

The problem with blaming the current pause in the economy on such factors is that economists don't have much in their books or on their charts from which to draw experience. How much of a role price stability is playing is impossible to measure.

Other Explanations

Moreover, there are other, more popularly mentioned explanations: The loss of business to imports, in part because the value of the dollar has remained so high; the unusually steep real interest rates; the uncertainty of deregulation, exacerbated now by possible tax reform; the fear of what unprecedented federal deficits might do to the nation in the years ahead.

Don't dismiss any of those. They're all a part of what's going on. So, too, may be the fact that almost all recoveries are uneven. Don Conlan of The Times Board of Economists made that point forcefully in a recent column, arguing that statistically this recovery is roughly on schedule with those of the past.

But don't forget what's happened to inflation, either. We put ourselves through the wringer to achieve this modest inflation rate, so we oughtn't to worry too much about its current impact. If it is a key factor affecting things these days, then the current pause isn't all bad. Continuing restraint may help build a more durable recovery, once companies learn to cope.

Coping means getting the house in order, as many companies tried to do during the economic slump. It also requires keeping them in order even in better times.

Glance at the headlines on the business page and it's evident that a lot of that housecleaning is continuing. In the most dramatic form, it's called restructuring as management discovers that many of those operations acquired in the heady, spendthrift days of the last decade don't look so good in the current one. Or find that some of that debt taken on to pay for all that baggage doesn't sit so well now, with little inflation to cheapen the cost of paying it back.

So the headlines may read a lot like uncharacteristic gloom for this moment in the economic cycle. Just don't be surprised if it all really turns out to be good news.

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