Energy Prices, Weak Dollar Cited : Upward Drift in Inflation Is Seen for Rest of Decade
Like an errant relative who can be counted on to show up sooner or later at dinner time, inflation seems to be making a gradual return to the U.S. economy, in the view of a growing number of economists.
The key reasons include a halt in last year’s downward skid of energy prices and the plunge in the value of the dollar, which has started to force up the prices of imports with some American products following suit.
Consumer prices rose at an annual rate of more than 5% between November, 1986, and February of this year, compared to inflation of 1.1% in all of last year. And while the current pace is expected to slow down, some analysts now foresee an upward drift of prices through the remainder of the decade. These same analysts predict that inflation’s impending visit will be relatively tolerable, however, compared to the double-digit episodes of past years.
Kathleen Cooper, chief economist at Security Pacific National Bank, predicted that inflation will gradually reach an annual rate of 6% to 8% by the end of the 1980s, but will peak at that level. Inflation “is coming back,” she said. “But it’s not going to get anywhere close to the kind of inflation we had in the early ‘80s.”
While the general public is not likely to welcome the possibility of higher prices, a tame brand of inflation would be greeted enthusiastically in some quarters. Corporate profits, for example, have been squeezed in recent years, because companies have found it difficult to boost their prices. The profit picture would improve if the atmosphere becomes more conducive to price hikes.
Some inflation also would be seen as a happy alternative to the deflation that has dragged down prices and land values in large sections of the nation’s interior, an acute dilemma that has been little noticed in the healthier economic regions along each coast.
Falling energy prices have spread economic pain through Texas and other oil-producing states. Farms throughout the Midwest have wrestled with foreclosure as agricultural goods have dropped in value. The condition has strained banks, equipment suppliers and other industries throughout the Oil Patch and Farm Belt, forcing many out of business.
To those who have been caught in the downward spiral, a switch to modest wage and price hikes would seem a welcome relief.
“If you’re a politician from Kansas or Texas, and your party controls the White House--and you want to be in the White House--you say ‘the hell with this,’ ” observed Jerry Jordan, chief economist at First Interstate Bancorp and a former member of President Reagan’s Council of Economic Advisers. “ . . . The truth is that stable prices are not acceptable politically.”
Predictions Could Be Wrong
Economic forecasting is a risky business, to be sure, and there are various reasons why inflation predictions could prove wrong. The ability of oil exporters to stave off a future price plunge is not a certain thing. Intensifying global competition continues to force companies to clamp down on wages and other costs. And sluggish economies throughout Europe and Asia are not generating the sort of demand for products that creates widespread pressure to hike prices.
“Whether they’re crying wolf or they’re right this time remains to be seen,” said A. Gary Shilling, a New York economist who points out that his professional colleagues have periodically sounded false alarms of inflation in recent years. “I frankly think that the burden of proof is on those who say inflation is coming back.”
But there is growing evidence to suggest that the consumer romance with 1.1% inflation--the lowest in a quarter century--is over.
Energy prices, which plummeted 20% in 1986, regained almost 5% in the first two months of this year before slowing down, said Nigel Gault, an economist with Data Resources Inc. Gasoline at the pump went up almost 11% during that period.
Energy Costs Level Off
The about-face in energy triggered an unusual price leap in January that would have yielded inflation of more than 7% if it kept up. In February, however, the climb leveled off to an annual rate of 5.2%, as oil prices steadied.
According to a survey at the time by the National Assn. of Business Economists, 35% of the members anticipated price increases for their companies’ products this year, almost double the percentage expecting price increases as recently as late 1986. For those whose companies produce goods, as opposed to those that provide services, the figure anticipating price hikes was 46%.
Jordan, who is president of the association, sees such plans as evidence that inflation is already knocking on the economy’s door. “For the first time in my life, I hope I’m wrong,” he said. “But I think there’s almost no chance.”
Economists are also watching the value of the dollar, which has declined relative to currencies from Japan and Europe. The lower dollar is intended to help U.S. companies, because it can make goods from certain other nations more expensive. The broader goal is to reduce the massive U.S. trade deficit. Consumers are starting to shoulder the burden of reaching that goal--in the form of rising prices.
Rise in Car Prices
Since September, 1985, for example, Japanese car prices in the United States have gone up from 17% to 20%, according to industry analysts. American auto makers have followed suit by raising their own prices about 8% during the period.
“Companies haven’t been able to raise prices as much as they would have liked to over the past few years because of foreign competition,” observed Cooper of Security Pacific. “Now they have the ability to do it.”
In some cases, business improvements brought on by the lower dollar are causing U.S. plants to run much closer to capacity than they have been, a situation that is heating up the prices of some products. While far from pervasive, such pressures are building in the chemical, lumber, pharmaceutical and paper industries, said Donald Ratajczak, director of economic forecasting at Georgia State University.
This has particular impact in industries, such as chemicals, that have cut costs in recent years by shutting down inefficient plants. Prices for various petrochemicals, including styrene, used in plastic cups, and vinyl chloride, used in dashboards, have risen more than 10% in recent months. “We actually began to experience this upward price movement in 1986,” said Myron Foveaux, economic spokesman for the Chemical Manufacturers Assn.
Impact on Wages
While certain businesses may feel the benefits of inflation quickly, they may suffer from it later. Some economists warn that a broader pattern of rising prices ultimately could trigger higher wage demands, a situation that in past years created an upward spiral of prices and wages.
“What we’re trying to get into their (executives’) heads is that further declines in the dollar are going to create inflationary pressures--and upward wage pressures,” said Ratajczak, who cites 6% as the likely peak of the emerging inflation cycle. “They’re fooling themselves.”
Nonetheless, a survey last week of 51 economists by Blue Chip Economic Indicators, a Sedona, Ariz., newsletter, underlined the fact that the profession foresees a far more gentle sort of inflation than that of the past. The group’s average projection was 3.4% for 1987, moving to 4.3% in 1988, although some responded that prices would rise more than 5% next year.
Those who argue that inflation is not coming back fault the other side for focusing too much on the past. The anti-inflation view maintains that new global conditions, such as the emergence of full-fledged industrial competitors in South Korea, Taiwan, Hong Kong, Singapore and Brazil, will continue to force business to keep prices down.
Hike in Rates Seen
“Everybody is waiting for the reinflation,” said John Rutledge, chairman of the Claremont Economics Institute, and one who doubts the resurgence of inflation. “Everybody is waiting for the interest rates to go back up.”
Yet even a modest inflation would have a significant effect: A rate of just 4% could whittle away more than one-third of the dollar’s value in 10 years. “Clearly, corporate profits will benefit and the oil industry will benefit to an extent,” said Lawrence Chimerine, chairman of Chase Econometrics. “But, by the same token, the American public gets hurt because inflation squeezes purchasing power.”
In any case, such figures can easily mislead. Consumer prices last year rose 3.8%--not 1.1%--if energy costs are not considered. Charges for various services, such as health care, rose more than 5%.
And while parts of the nation’s middle were coping with deflation, prices rose faster than average in California and the Northeast. “For any one person, it depends on what their own basket of goods looks like,” Jordan said. “The national statistics say it was 1.1% last year--but nobody’s average.”
