America is facing a new and potentially dangerous import threat: inflation.
Almost unnoticed in the United States, inflation has been accelerating visibly in several major industrial countries--particularly Britain, West Germany and Italy--and has reached serious proportions in many developing countries, including some in Southeast Asia.
That is likely to have unhappy consequences for the United States. For one thing, overseas inflation will ultimately boost the prices of imported goods in the United States, and that will enable U.S. producers to raise their prices as well.
And more than that, price increases abroad will force foreign governments to react much as the Federal Reserve is responding here--by forcing up interest rates. That in turn will put pressure on the United States to raise interest rates further, lest the value of the dollar decline. And analysts here are already worried that rising interest rates threaten to trigger a recession.
What makes the inflation speedup abroad so ominous is that it comes at a time when a price surge is becoming serious here in the United States--a factor that makes America far more vulnerable than usual to inflation pressures from outside.
William C. Melton, chief economist of IDS Financial Services, a Minneapolis firm, worries that with prices already accelerating here, every added bit of pressure threatens to send wages surging as well--eventually setting off a 1970s-style wage-price spiral.
“It’s a pretty significant threat,” Melton warned.
Although Federal Reserve Board Chairman Alan Greenspan did not specifically mention overseas inflation in his testimony to Congress earlier this month, U.S. government officials are eyeing it warily. “It really is getting dicey,” said a government economist who asked not to be identified.
The speedup in overall prices in the major industrial countries is not the only worrisome omen. World prices of many key commodities are also surging, especially prices of oil and various metals--a development that spreads quickly to the United States and adds significantly to production costs here.
Demand Remains High
At the same time, virtually all of America’s major trading partners are enjoying robust economic growth, meaning that worldwide demand for goods and services is continuing high. That could further intensify inflationary pressures, much as happened in 1973.
Robert Z. Lawrence, a Brookings Institution economist, points out that the pickup is coming at a time when the dollar is strengthening, which helps to hold down inflation here because it reduces the number of dollars required to buy imports. If the dollar plunged suddenly, he warned, inflation “easily could jump above the 5% line.”
Indeed, figures published by the Commerce Department last week show that, partly because of the increase in oil prices recently, import prices have finally begun to rise more sharply after remaining relatively stable for most of the past several months.
Melton predicts that they will be climbing far more sharply by the end of this year, making them a major contributor to inflation here.
The speedup in inflation in other industrial countries is visible by any measure:
Consumer prices in Britain rose at an annual rate of 10% in January, up from a 6.5% rise in 1988 and enough to help send interest rates there soaring. The Paris-based Organization for Economic Cooperation and Development has already warned London to turn the situation around.
Inflation in Italy surged to a 6.1% annual rate in February, up from a 5% rise in 1988.
West Germany’s inflation rate is running at 2.6% annually, low by U.S. standards but more than double the 1.2% rise recorded last year.
Even Spain is experiencing renewed price pressures. Finance Minister Carlos Solchaga told business executives recently that the government cannot hope to meet its 3% inflation target this year. He said the best prospect now is to keep the price surge below last year’s 5.8% rate.
Among the industrialized nations, only Japan is continuing to enjoy relative price stability.
And in Taiwan and South Korea, notes Joel Popkin, a Washington-based inflation specialist, wage demands have pushed inflation rates higher since 1987. He predicted that those two nations would provide “a significant source of inflation pressures” in the United States this year and next.
World commodity prices, according to the price index of the British magazine the Economist, are up a hefty 11.8% over a year ago. Industrial commodities are 13.9% higher, according to the index, which is considered to provide the best thumbnail view of the situation. Metals prices have leaped by 22.8% over the year.
“I think we have a really broad-based inflation situation here,” Popkin asserted. “The genie already is out of the bottle. What I don’t understand is why so many people seem to be so sanguine that we’ll be able to stuff it back inside.”
Roger Bird, an international economics specialist at Wharton Economic Forecasting Associates Group, is one of those who does not expect the price pickup overseas to prove threatening to the United States. He notes that the price increases in Europe still are relatively modest.
Recent data “has put people on notice that inflation pressures are rising, but we’re still not to where you’d argue that we’re in danger of losing control,” Bird said. “We’re talking about 1 or 2 percentage points in the European countries--not a major shift.”
And even Popkin dismisses the notion that the industrial world may be headed for another explosion of demand, such as occurred in 1973. “What happened in 1973 was driven by excessively easy monetary policies,” he said. “Today, the Fed is leaning against the wind.”
Nevertheless, Bird concedes that the impact from abroad may prove sufficient to make it decidedly more difficult to keep the dollar stable in coming months, as finance ministers of the United States and its major economic allies have said they want to do.
May Have to Tighten
Policy-makers earlier had hoped that Europe and Japan could ward off any fall in the dollar’s value by loosening their money and credit policies, thus reducing their interest rates and decreasing the appeal of investments in their countries. Such a course, however, would increase their risk of even more inflation.
“Now, the U.S. may have to tighten the vise a bit more than we otherwise might have had to,” Bird said.
And Bird contends that the need to maintain tighter money both in the United States and abroad could constrain the ability of the industrial countries to counter any coming recession.
“The extent to which the U.S. can rely on its major trading partners for help is eroding significantly,” he said.
“We’ve been lucky on import prices so far,” Melton said. “That may be about to end.”
INFLATION AROUND THE GLOBE
Annual increases in consumer prices
1985 1986 1987 1988 1989* United States 3.5% 1.9% 3.7% 4.4% 7.4% Britain 6.1 3.4 4.2 6.4 10.0 Italy 9.2 5.9 4.7 5.0 6.1 West Germany 2.2 -0.2 0.3 1.2 2.6 France 5.8 2.5 3.3 3.0 4.9 Japan 2.0 0.6 0.0 1.1 0.0 Canada 4.0 4.2 4.4 4.1 4.9 Taiwan -0.2 0.7 0.5 1.5 NA South Korea 2.5 2.8 3.0 7.1 2.6
* Latest monthly increase at annual rate
Sources: International Monetary Fund, Taiwan