Specter of ‘70s : The Taming of Inflation: Will It Last?
Like millions of other Americans, Mary White, a single mother of four, vividly remembers the days when double-digit inflation ravaged the nation’s economy--and sense of security--during the 1970s and early 1980s.
To White, who was going through a divorce at the time, taking care of the children meant an unending search for bargains in discount stores and making meals from lots of economy-size packages of chicken: “I always keep it in my mind that it could happen again,” said the 34-year-old office administrator, who lives in Torrance. “You never know.”
Her outlook remains cautious at a time when inflation would seem to be only a bad dream. Plunging oil prices last year held the rate of increase to 1.1%, the lowest since 1961. It has been more than five years since the last double-digit annual increase, and few experts predict that such a problem will flare up again soon.
Factors of the ‘80s
The world of gas-station lines has been transformed by a glut of oil, and other forces are working to suppress prices: bruising competition within many industries, cheaper technology and a surplus of commodities throughout the world. In a reversal from the 1970s, manufacturing capacity worldwide now exceeds buyer demand in a number of industries.
Consumers have adapted to the changed economic conditions in many ways. They are refinancing loans to take advantage of lower rates. They have changed investment strategies to benefit more from the stock market than from real estate, collectible items and other “hard assets” that were better investments during the period of high inflation.
The new environment of more palatable prices and interest rates has encouraged a buying binge that has fueled much of the economic growth since the last recession. Yet, even as White and others adjust their financial decisions to today’s conditions, they are wary of a new outbreak of inflation.
Inflation Left Imprint
Just as the Depression of the 1930s traumatized an earlier generation, the skyrocketing prices of more recent years, though less catastrophic, remain hard for younger people to forget.
“The experience in the late ‘70s and early ‘80s was unprecedented in America since World War II,” said Sandra Shaber, an economist with the Futures Group, a private consulting firm in Washington. “I think anybody who lived through it has to be permanently scarred-- and afraid it will happen again.”
Most economists see such fears as exaggerated but not entirely off base. Many analysts--noting that last year’s 1.1% inflation rate would have been around 3.8% without the collapse of fuel prices--expect prices to creep back up toward a 4% inflation rate this year, and perhaps 5% after that. That is largely because oil costs are likely to rise, and the dollar’s low value abroad is expected to make imported goods more expensive.
To many who grew up during the years of galloping inflation, a gradual escalation of prices would hardly be a surprise. Edward J. De La Rosa, 32, an investment banker in Los Angeles, recalls the effect that inflation had on his career plans: “I remember thinking to myself, I needed to get into a profession where you make a lot of money, because things would cost more and more and more and more.”
Today, De La Rosa can afford a three-bedroom house with a swimming pool, a 1986 BMW and suits by Giorgio Armani. Yet inflation remains a concern as he contemplates his personal investment strategy. A couple of years ago, he invested in fixed-income securities, which guaranteed him a certain return even as rates continued to fall.
Now, he says, he would be more inclined to bet on the stock market. “I don’t want to buy (fixed-income securities) and then have the value eaten away because rates start to rise,” he said “. . . It’s unrealistic to think that rates will fall much further.”
More House Hunters
The mercurial behavior of prices and interest rates, of course, affects everybody’s fortunes. “Rents have not risen as much as they have in the past,” said Laura Davis, 35, who owns a television production company in Marina Del Rey. She added: “With interest rates having fallen to where they are, I’m now looking for a house.”
In the 1970s and early 1980s, people who put off making needed purchases were penalized, because they got stuck paying higher prices. “When we had double-digit inflation, it was, ‘Buy now or the price will go up,’ ” Shaber recalled. “In the last couple of years we’ve seen a very dramatic reversal. If you could ascribe a slogan to it, it would be: Wait, and the price will go down.”
Another slogan for inflationary times might be: Borrow, borrow--and borrow some more. The strategy exploited by many in the 1970s was to borrow money, invest the cash--and profit as the investments paid back higher rates than the loans cost.
A businesswoman who lives with her husband in Silver Lake remembered the couple’s successful method for making thousands of dollars in the early 1970s. They borrowed $50,000, using their home as security, then invested the money in municipal bonds that paid back higher rates of interest. “We could have borrowed more,” the woman, 53, recalled with a laugh. “I said yes at the time, and my husband said no. Later, he wanted to kill himself.”
Rules Have Changed
Now that interest rates have cooled down, and with new restrictions on tax deductions for interest, she added: “It’s not so easy.”
Even without the chance for such inflationary bonanzas, Americans have been piling up record levels of debt in recent years, a situation that puzzles and concerns many analysts. One clue may be found in the flip side of the wage-price spiral--the 1970s dilemma in which wages and prices kept kicking each other higher and higher.
The situation today is very different. Companies find it harder to raise prices, and they are more willing to clamp down on payroll costs. As a result, many workers are struggling to improve their living standards in a time when wage gains are meager.
“Consumers are maintaining a certain standard of living by tapping savings, by getting into debt, by doing all kinds of things to replace the growth in incomes that they had in the past,” said economist John Tuccillo, a vice president of the National Assn. of Realtors.
One sign of consumers’ wishes to preserve their standard of living--and the endurance of inflationary fears--is the popularity of the fixed-rate mortgage, an arrangement by which monthly loan payments stay the same even if interest rates rise. The alternative “adjustable-rate” mortgages require smaller monthly payments these days, but allow for the amount of installments to climb if interest rates go up.
Fixed Rates Are Popular
Fixed-rate mortgages have gained popularity as interest rates have dropped. Last year, when rates began to fall below 10%, the percentage of home buyers who chose fixed-rate notes rose from about 50% to 65%, according to the Federal Home Loan Bank Board. “When fixed rates got below 10.5%, the home buyer thought, ‘What a good time to lock in a long-term mortgage at nearly single-digit rates,’ ” said Michael Wilson, a vice president of the U.S. League of Savings Institutions in Chicago.
That pretty well describes the thinking of Susan and Joel Volsky, who recently moved from Los Angeles to northern San Diego County. Susan, 37, works part time at home as a legal secretary. Joel, 40, installs accounting programs in computers. About six months ago, they found the house they wanted, priced “in the high two hundreds,” with three fireplaces and an ocean view.
When the time came to select a mortgage, “My husband and I got a fixed-rate to protect ourselves,” said Susan Volsky. “I don’t know how much you could trust an adjustable. It could skyrocket.”
Adjustable rates can decline as well, which they have done recently. Not wanting to be left out, many of those with fixed-rate mortgages last year applied for new loans to get easier terms.
Old Notes Turned In
According to the National Mortgage Institute, 40% of the mortgages written in 1986--$160 billion worth--were for refinancing, almost twice the usual proportion. “They (homeowners) were getting out of the 12%, 13%, 14% interest rates that they were forced into a few years ago, and getting about 10%,” said Marshall Dennis, executive director of the educational group in Fairfield, Ct.
That pace is not expected to be maintained this year, however. Many economists point to the likelihood of higher oil prices and costlier imports in the coming months as evidence of an impending rise in prices, although not the spiral feared by Susan Volsky and others. Donald Ratajczak, director of economic forecasting at Georgia State University, for example, foresees a drift perhaps into the 5% or 6% range of inflation before the end of the decade.
“We don’t see any resurgent, runaway inflation around the world, but clearly, there’s a problem with the dollar’s decline,” he said. “I’m nervous about 1988 and beyond.”
The weak dollar not only makes imported goods more expensive. In the view of some analysts, it poses a sort of domino-like risk: Ultimately, it could prompt foreigners to unload U.S. currency holdings, and that would force up both interest rates and prices.
Low Inflation Seen
John Rutledge, chairman of the Claremont Economics Institute, argued that most of his economist colleagues fail to appreciate how inflation-resistant the world economy has become in the last several years. He predicted that inflation will stay under 2% into the early 1990s, and added: “I don’t think a (rate) like zero is crazy.”
That would surely be happy news to the 14% of respondents to a New York Times/CBS News January survey, who cited inflation as the economic problem that bothered them most. It would also please Mary White, who is still struggling to raise children ages 7, 11, 13 and 14 on a salary she puts at “roughly” $25,000.
“It was just so hard,” she recalled of past years. “You couldn’t get anything for your kids.” The lower interest rates have clearly helped: Last year, White was able to take out a 9% car loan and buy a new Chevrolet Camaro. Nonetheless, she added: “I think there’s still too much inflation. I really do. I wish prices would come down a little lower.”
From his vantage point higher on the economic ladder, De La Rosa has not forgotten the difficulties of past years, either. Earlier in his career, when he was earning between $35,000 and $45,000 a year and helping to put his younger brother through college, he said, “I remember having a job and making more than my dad--and being surprised that I couldn’t afford a house.”
These days, he hedges his bets. He plans to refinance the 10.87% mortgage on his house, for example. But he’ll stay away from an adjustable-rate loan--to ensure that his payments will not climb if interest rates perform an about-face.
Said the investment banker: “I don’t want to throw the dice and get burned.”
