State of Mind v. State of Facts

THE public has become obsessed with the fear of inflation." Thus last week spoke Dr. William C. Freund, economist for the Prudential Insurance Co. of America, in taking an unfrightened look at the bogeyman that haunts the U.S. economic revival. The worry that inflation is ready to start shooting prices up again is nowhere more evident than in the stock market, which last week reached a new high (see State of Business). But is the new inflation psychology justified by the economic facts? Answers Dr. Freund: "The stock market reflects a too acute awareness of the long-term aspects of inflation at a time when the danger of inflation is simply not present."

While economists agree that the fear of inflation is outdistancing reality, they manfully take part of the blame themselves. Says a top Government economist: "Some of us may have warned a bit too well. You can't flaunt a specter as vigorously as this one has been flaunted without scaring some people. I'm afraid a lot of our problem of inflationary psychology has been of the Government's own making." Even the Federal Reserve Bank, which waved the warning flag hardest, is having some second thoughts. Says a Fed spokesman: "As you look at the economy now, inflation is a state of mind rather than a state of facts."

The facts: aside from the stock market, whose rise has also been sparked by the expectation of better business and profits, virtually every economic indicator that usually signals inflation is failing to do so now. Chief among these is inventory liquidation, which has continued despite the recovery. If businessmen thought they would have to pay more for raw materials six months from now, they would start building up inventories instead of continuing to cut them.

One reason businessmen do not expect to pay more for their materials is that most commodity prices, which are quick to reflect inflationary pressures, have remained steady. The sensitive price index for 22 primary commodities, for example, remains close to the lows reached last fall. Since wholesale prices usually foretell retail prices, this promises well for the consumer. Another happy sign for the consumer is that consumer prices actually declined last month. Most businessmen agree that despite price increases in autos and a few other items, there will be few shifts in price levels over the next six to twelve months--a distinctly noninflationary factor.

One big factor in keeping prices level is the excess capacity built by U.S. industry during the boom. This now permits the economy to recover and expand without pressure on production resources, thus preventing demand from overrunning supply--and forcing up prices--in the fashion of classical inflation. It also means that industry tends to produce more efficiently, thus cutting costs and helping to keep prices steady.

The rise in productivity is vital because it helps offset rising labor costs, a big push behind inflation. So far, productivity is running ahead of 1958 wage hikes; autoworkers settled last month for more moderate terms than in recent years (4% wage rise for Ford). The cost of the new contracts has already been written into 1959 car prices. Said Frederic G. Donner, chairman of General Motors, in Manhattan last week: "I think it's fair to say that the contract, as we have signed it, would not require any further adjustment in prices."

Could a splurge in car buying put strong pressure on raw material prices? Says Norman B. Ture, staff economist of the Joint Economic Committee: "I don't see it. Say autos go up to 6,000,000. That won't be enough to exert real pressure on steel, aluminum, glass or rubber capacity. So a good strong demand in autos will not spread great demand pressures through the economy." And just as there are ample materials, so is there still an ample labor supply to keep a brake on wages.

The biggest inflationary specter rises out of the Government's huge ($12 billion) deficit. Yet even there the worry is lessening. Just as last year's deficit was bigger than anyone expected because tax returns dropped in the business slump, so the current deficit may be smaller by $1 billion or $2 billion as business improves and tax payments increase. Says a U.S. Treasury spokesman: "An unbalanced budget does not just of itself create inflation. The extent to which you put it in the banks is the extent of its inflation. This $12 billion will be financed partly by the banks, but that part will not be enough to change the direction of the country. The deficit has become an overemphasized symbol of inflation."

The signs that runaway inflation is not a present danger do not mean that inflation is dead forever. But barring another Korea, or a letup in the Federal Reserve Board's vigilance over monetary policies, most economists feel that the price level will be stable for at least a year.

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