Why Inflation Runs on Faster Track in U.S.

Like chronic back pain or migraine headache, inflation is returning to the U.S. economy. The symptoms lately have been unmistakable: a sharp hike in the producer price index a week ago followed by a jump in the consumer price index last Wednesday that made it look as though inflation had increased to 6% a year.

Economists argue that Wednesday’s jump gave a too-gloomy signal, but most agree that inflation is back after years when prices rose relatively little--1.1% in 1986, 4.4% in 1987.

Prices might rise 5% this year, says Robert Chandross, chief economist of Lloyds Bank in New York, but “there’s no reason to talk about a repeat of the 1970s,” when prices rose as much as 14% a year, and mortgage rates went to 18%.

It’s not a question of rate but of duration, says economist David Levine of the Sanford C. Bernstein research firm. Levine says inflation will be at 5% in the fourth quarter and keep rising through next year--or until it becomes intolerable and the Federal Reserve hikes interest rates enough to throw the economy into a recession.

But wait a minute. Why are we getting another attack of inflation when other countries aren’t? In the last year Japan has had negative inflation--prices fell--and over the last five years it has had lower inflation than the United States. (Never mind what you’ve heard about $60 honeydew melons in Tokyo.) West Germany, too, has low inflation. Why are U.S. prices rising faster?

One reason is the falling dollar, which makes foreign goods more expensive. The rising price of an imported Toyota adds to U.S. inflation, as does the imported clothing that was the principal reason behind Wednesday’s jump in the consumer index. But such currency-related inflation is unlikely to cause the Fed to hike interest rates, explains economist John Hekman of the Claremont Economics Institute. “The Fed regards that kind of inflation as inevitable,” he says.

But what the Fed doesn’t want to see are wages rising without higher productivity or prices being raised for no good economic reason. In that respect, wages are not a problem at present, having risen less than 3% in the last year.

Taking the Short View

Prices, however, are another story. “A big reason for the inflation,” says James Cochrane, senior vice president and economist of the Texas Commerce Bank, “is that U.S. business is raising prices instead of pushing to increase market share.” He means that as foreign producers raise prices on goods shipped to America--because it takes more dollars to offset costs in their own currency--U.S. companies are not taking competitive advantage but are raising their prices, too, and reaping a windfall profit.

“You name it, automobiles, chemicals, steel, they’re raising prices under the currency umbrella,” says Cochrane. “The problem, sad to say, is the shortsightedness of U.S. business.”

Companies in those industries argue that they are only regaining adequate prices after a long depression and that they need the profits to renovate aging plants. But clearly, too, many are seizing a quick and easy profit.

How can such things go on? Because it’s a free country--seriously. It’s unlikely that Japanese or German companies could grab a profit at the expense of national policy as some U.S. companies are now doing. To a much greater degree than Washington, Tokyo and Bonn tell companies directly and indirectly what to do--it’s how they run their economies.

Should Washington do likewise? Probably not. There are philosophical questions there. Americans might like to see corporate bosses told off. But they would object to other controls and restrictions common to foreign economies.

However, make no mistake, big questions will be asked about U.S. corporate practices if inflation becomes rampant and causes a recession--or causes nasty problems with foreigners who are lending $150 billion a year to finance the U.S. government deficit.

Is there any hope? Sure, U.S. business could fight to retake markets from imports and extend its efforts to win markets overseas as well. That would buoy the economy greatly and put inflation in remission, again.