Chorus of inflation doves has begun to grow louder


EVERY WEEK, THE durable idea that inflation is about to ignite and spread like an Idaho wildfire is tested more severely. It is beginning to wilt.

The government estimates that the country's economic output rose at a 4.8 percent annual rate in the spring, a sprinting pace and the latest in more than four years of consecutive quarterly increases. Unemployment has been below 6 percent for almost two years.

Either of those conditions -- consistently high growth or low joblessness -- is supposed to raise the risk of inflation. Both together are supposed to guarantee it.

The theory is that a growing economy will vacuum up resources such as labor and commodities, rendering them scarcer and thus boosting their prices.

But the basic U.S. inflation rate continues at its tame, stately pace of about 3 percent. The inflation pessimists are running out of excuses, and the inflation optimists are gaining boldness, credibility and even influence.

Listen to Alan Greenspan, patron saint of The Knights Vigilant of the Order of the Consumer Price Index, three days ago: "For the first time in at least a generation, the goal of price stability is within the reach of all major industrial countries."

He went on to talk at some length about how the Consumer Price Index, the main inflation yardstick, might overstate true price increases. Actual inflation could be "considerably lower," Greenspan said, because the CPI doesn't account very well for product improvements in the silicon age.

For example, while personal computers cost about what they did 10 years ago, they're many times more powerful. Yet CPI statisticians act as if today's Pentium machine is the same as a primitive IBM PC with an 8086 chip.

"The economy seems irreversibly evolving toward producing more of the impalpable forms of output and, hence, making it ever harder to define price," Greenspan said Friday. "Measurement problems obscure our vision" of inflation.

Greenspan's remarks, and his failure to tighten the money supply a week previously, are the best signs yet that he is heeding the swelling choir of inflation doves.

The latest voice belongs to Roger Bootle, a British professor and chief economist of the parent company of Midland Bank.

"Anyone born in the last 60 years has known nothing else but prices continually rising, and it is natural for people to assume that the future is going to be similar to the recent past," Bootle writes in "The Death of Inflation." "Sometimes, though, this assumption can be dangerously off-beam. Sometimes history reaches a breakpoint. It is at a breakpoint now."

Bootle makes a case similar to that of other doves: That unions have lost the power to extort raises out of employers. That the global economy has increased the intensity of price competition geometrically. That classic monetarist theory isn't quite right about the relationship between prices and the money supply. That consumers no longer expect inflation and won't behave in ways that fuel it.

But Bootle doesn't just think inflation will saunter along at 3 percent annual rates. He believes prices will fall in some years, rise slightly in others.

And he thinks interest rates have far to drop, too.

Interest rates are closely linked to inflation, because lenders demand higher rates if they think inflation will corrode their principal. Bond buyers typically ask for coupons of at least 2 percentage points beyond what they think inflation will be.

But lenders are still behaving under Bootle's old assumptions. Spooked by last week's signs of economic strength, they bid up rates again. The yield on the Treasury's main 30-year bond soared well over 7.1 percent last week.

If Bootle and his ilk are right, and inflation really will be flat in coming decades, 7 percent bonds are a screaming buy.

Hello, Legg Mason? I'd like to speak to a fixed-income broker, please.

Pub Date: 9/02/96

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