TIMES BOARD OF ECONOMISTS / GEORGE L. PERRY : Inflation Is Not Posing a Serious Threat to U.S. Interest Rates--Yet

Interest rates are a crucial force in the economy. For one thing, they are the primary means through which policy-makers influence the business cycle.

As a current example, the Bundesbank, Germany’s central bank, is dragging Europe through a deep recession by maintaining short-term interest rates at levels much too high for the current state of those economies.

But interest rates pose more immediate concerns to many individuals. Interest payments are the single most important cost of homeownership. Interest earnings are a large part of total income for many retired individuals. And interest rates have a significant effect on the level of stock prices.

Over long periods or across countries, inflation rates are the single most important factor behind differences in interest rates. But over shorter spans, short-term interest rates in the United States and other nations basically are determined by the central bank. Our own Federal Reserve adjusts its policies in response to what it sees as emerging conditions in the economy. And what the Fed cares about most is inflation.

This spring, some observers saw signs that inflation might be picking up. The Fed, they reasoned, would react by raising interest rates. That expectation caused Wall Street to worry, because higher rates would be bad for the stock market. It also led some economic forecasters to lower their projections for economic growth this year, because higher rates would slow activity in such interest-sensitive sectors as home building.

Is there really cause to worry that the Fed may be raising interest rates soon? It seems unlikely, even though in recent months two of the Fed governors who vote on monetary policy indicated they were leaning that way.

Two developments had led observers to worry about inflation.

The first was a run-up in the price of gold, made more dramatic by the disclosure that the world’s most famous speculator, George Soros, had taken a bullish position on the price of the metal.

Historically, gold was used as a store of real value and a safe haven in times of political and economic upheaval. Although it has usually been a poor place to invest one’s wealth, it still has its mystique in some countries and among some individuals. Occasionally, as in the early 1980s, it has even been a spectacular speculative vehicle for a brief time.

But there is no reason to believe gold prices have any noticeable effect on finished goods’ prices or that they predict inflation more broadly.

The second source of recent inflation concerns was the consumer and producer price indexes.

Over the first four months of the year, the CPI rose at an annual rate of 4.3% and the PPI at an annual rate of 4.7%. The increase in the PPI was especially troublesome because that index does not reflect the chronic increases in the prices of medical and other services--and because the PPI had been nearly stable over the previous two years.

If the January-April trend were to continue, that would represent a clear speed-up of inflation. Confronting such a speed-up, the Fed would be likely to raise interest rates.

Quite properly, in my view, the Fed did not raise rates on this evidence. On close inspection, some of the price increases this year came from bad weather or onetime recoveries in prices that had been depressed earlier by poor sales. And the latest price data support the governors’ prudence: In May, the CPI rose only 0.1%; the PPI did not rise at all.

One month of good news on prices is not in itself convincing, of course. The more important reason for not overreacting to the earlier run-up is that it was inconsistent with other evidence about the basic inflation situation.

Most notably, the best measures of wage costs--which make up most of the cost of producing goods and services--show no acceleration at all from the modest increases of the last four years. During 1992, wages and salaries in the private sector rose only 2.6%, and there is no evidence of any important speed-up so far this year.

If, as hoped, employment growth picks up and the unemployment rate declines, there will be greater upward pressure on wages in the years ahead. But for now, wage costs are not accelerating. And without an acceleration of wage costs, a spurt in prices is not likely to become a genuine, worrisome increase in the inflation rate.

The Federal Reserve, of course, is concerned about inflation all the time. It will be the first, not the last, to detect a genuine problem if one should emerge.

On the other hand, we are fortunate that our own Fed does not have the tunnel vision of the present policy-makers at the Bundesbank. For now at least, it remains a good bet that U.S. interest rates will not be pushed up by the Fed. The economic expansion will continue. And if the stock market should fall, it will be for reasons other than rising interest rates.