NEWS ANALYSIS : Experts Play Down the Threat of Inflation : They Say That Recent Price Increases Are the Result of Natural Events

Is inflation a threat or not?

The question lately has been of great concern, with economists and others saying not to worry but some investors just not believing it.

Indeed, fearing inflation, investors on Friday pushed yields on long-term bonds to above 7% for the first time in six weeks. They also have sparked a mini-rally in prices of gold and silver--traditional inflation hedges--since early March. Gold-mining shares reached five-month highs on Friday, although they fell back slightly on Monday.

And there are other signs of inflation. The Commodity Research Bureau index of commodities prices increased 7% in two months, reflecting significant price hikes for scrap metal, sugar, beef and soybeans. Rising lumber prices--up 150% since October--have added $4,000 to the cost of a typical house, although builders say that, for the moment, they are absorbing that added cost so as not to scare off buyers.

But despite these recent signs of inflation fears, most economists, manufacturers and consumer goods producers uniformly downplay the danger of recent rises in interest rates and some commodities prices. The early 1980s bugaboo of higher inflation will not raise its ugly head anytime soon, they say.

These experts insist that the rise in certain commodities prices is mainly because of natural phenomena or cyclical events, not economic pressures created by the nation’s slow-building economic recovery.

Swiss Bank economist Kevin Logan, insisting that the U.S. economy is in no danger of rapid inflation, said consumer prices won’t increase by more than 3.5% this year, a manageable increase from last year’s 2.9% inflation rate.

“Mild inflation for the rest of the year,” Logan said. “That’s our outlook, and don’t let anyone tell you any different.”

UC San Diego economist Ross Starr said that there is too much “slackness” left in the economy in the form of unemployment and idle plant capacity and that it will take months before it is worked off and for pressure to build on prices.

Nationwide, factories are operating at about 79% of capacity. In past recoveries, inflation hasn’t surged until plant capacity reached 85% or so, Starr said. High plant capacity means companies are having to produce more goods to meet increased consumer demand--which in turn boosts inflation.

The Commodity Research Bureau’s research director, Gail Levey, also downplays inflation worries. There is “no tightness in the labor market that would be necessary to boost inflation higher,” she said.

Levey and others say that creation of new jobs is still too slow to translate into any meaningful rise in wages, a view reinforced by the new jobs totals for March. Non-farm payroll jobs rose 114,000 in March, a much lower number than expected, although many experts attributed it in part to heavy snows that hampered construction and other business growth.

Too many people are still out of work and willing to take low-paying jobs to pose a threat to manufacturing costs and consumer prices, Swiss Bank economist Christopher Rude said.

Over the last two years, an average of 36,000 non-farm jobs have been created monthly, Rude said. That two-year floating average will have to increase to 350,000 new jobs a month before wage costs increase significantly. At least, that’s been the case in prior economic recoveries.

Bad weather and politics--not any broad economic pressures accruing to a recovery--were cited by economists to explain a host of commodity price rises.

For example, beef prices are up because of the Midwest’s long drought and the “hard winter that we’ve had, which reduced beef tonnage dramatically, reducing supply,” said Randy Blach, market analyst with Cattle-Fax, a Denver-based beef market research firm.

Higher sugar prices were mainly because of last year’s Hurricane Andrew, which wrecked harvests in Cuba and South Florida, CRB’s Levey said.

“I just don’t see inflation hitting farm prices now or in the near term,” said Ray Borton, senior agricultural economist with the California Food and Agriculture Department. “There just have been no widespread changes that cause the ripple effects through the system.”

A spokeswoman for Lucky Stores, one of the state’s largest supermarket chains, said produce prices at the Dublin-based firm have actually dropped 3% over the first quarter, while non-food items sold in the stores rose only 0.4% over the first three months of 1993 when compared to last year’s first quarter.

Higher lumber prices have been blamed on Hurricane Andrew and the ensuing large-scale reconstruction in the Southeast, along with spotted owl conservation efforts and restraints on harvesting of government timberlands.

What about the recent uptick in gold prices? Bernard C. Savaiko, a precious metals analyst with PaineWebber in New York, said that while “the move up must be respected” as an signal of rising inflation worries, it could also be read as a search by investment managers for “an investment area that hasn’t moved. They could be looking for things that are undervalued.”

In fact, Savaiko said, his long-term outlook for gold prices is bearish because producer nations continue to sell the metal and because so many central banks in the United States and Europe are looking to unload their huge and unprofitable gold reserves. If gold reaches $350 an ounce, he expects a widespread selloff to begin.

What about scrap metal prices, up $30 a ton since bottoming out in October? Hardly a harbinger of manufacturing rebirth and inflationary pressures, said Robert J. Garino, director of commodities at the Institute of Scrap Recycling Industries, a Washington-based trade group.

Higher scrap metal prices “had nothing to do with inflation. It had to do with prices being so low for so long they had nowhere to go but up,” Garino said.

Is there a threat of the kind of higher energy prices that helped fuel the inflationary spiral of the 1970s? The disarray in the OPEC cartel and increases in Russian oil exports are keeping keeping prices stable, said Standard & Poor economist David Blitzer.

“I just don’t think inflation is going to be an issue in the 1990s,” Blitzer added.

Not even consumer watchdog Michael Shames, executive director of the San Diego-based Utility Consumers Action Network, is worried. “What we look at is oil and natural gas prices, the two main sources of energy in this country. We don’t see any significant rise coming in these commodities, short of seasonal fluctuations,” he said.