Analysts Sound Inflation Alarms : Downside of Jobless Rate Drop, Some Economists Say

After a long break from inflation, the United States is entering the early phase of a new cycle of quickly rising prices, some economists now say.

A resurgence of inflation may take a year or more, but if it does set in again, it might not be stoppable by anything short of a government-induced recession, these economists predict.

The U.S. economy has defied expectations of trouble many times before during this record, nearly 6-year-long expansion, and it may do so again.

The bond market, which is the most sensitive barometer of inflation, has been fairly calm lately. Interest rates are down from their highs of late May.

But inflation alarms went up Friday when the government reported that the nation’s civilian unemployment rate fell to 5.3% in June, its lowest level in 14 years.

The report added to inflationary concerns caused by the export-led boom in manufacturing, which has resulted in bottlenecks and spotty shortages.

A low jobless rate means employers are having trouble finding and keeping qualified workers. By the laws of supply and demand, that means wages could start rising rapidly. American workers have been tolerating low wage increases for so long that some economists have concluded that they have permanently lowered their expectations. In the last year, for example, wages rose 3.2%, failing to keep up with a roughly 4.4% increase in consumer prices. In June, the average hourly wage rate in private industry was no higher than the May rate: $9.27 an hour.

At some point, though, the tables are likely to turn. Workers will be in such demand that they will be able to insist on pay increases that help them catch up, or at least stop falling farther behind. And since wage costs account for about 55% of the cost of production, big pay increases could push the economy into an inflationary cycle.

Kenneth Goldstein, labor economist for the Conference Board, says the “startling” June jobless rate is probably a quirk caused by an underestimate of the size of the labor force. He says there is no strong evidence of a tight labor market.

But Lacy Hunt, chief economist of the CM&M; Group, said: “Wages are slow to react, but when they turn, they turn decisively and rapidly and then they’re hard to contain.” Hunt was the most pessimistic on inflation of 32 economists included in a forecasting chart published last week by the Wall Street Journal, predicting an inflation rate of 6.8% in the first half of 1989.