Visions of More Inflation

For the ninth straight month, consumer prices held steady in March at 123.7 of the 1947-49 index. This news from the Labor Department seemed proof enough that the U.S. is not in the grip of any new inflation, but it was almost drowned out last week in a rising din over the dangers of inflation ahead.

Vice Chairman C. Canby Balderston of the Federal Reserve Board warned the Philadelphia Bond Club that industrial prices have risen 2% since the recession low, sooner and more sharply than after the two last recessions, despite continued high unemployment and unused industrial capacity. The upsetting fact about this, said Balderston, is that the price level did not dip during the recession, perhaps because the downturn was so short. "The recent advances are piled on top of a level that never dropped down. When prices fail to decline during a recession, then they are in position to contribute to inflation during expansion."

One bad effect of this artificially high base, says Balderston, is that it crimps U.S. competition abroad (see Foreign Competition) and causes job losses at home. "The recent behavior of prices suggests that American firms have not improved their ability to compete at home or abroad. You hear of business being lost to foreign firms. This should give us cause to ponder, particularly about losses in lines where we have traditionally had an advantage. And firms can price themselves out of domestic markets, too. This should lead us to question whether job opportunities would not be greater if some prices were lower."

Blaming Profits. Congress also was beginning to dig into prices. One big reason they are so high, believe Tennessee's Democratic Senator Estes Kefauver and Wyoming's Democratic Senator Joseph C. O'Mahoney, is the "administered price," which largely ignores demand in deference to industry's effort to improve profits. Last week the Senate antitrust subcommittee, headed by Senator Kefauver, held hearings on a bill introduced by Senator O'Mahoney to require companies in highly concentrated industries to give 30 days' advance notice of any price hike.

The bill got no support from unions or industry. Steelworkers Union Chief David McDonald opposed the bill because he felt it would have "a stifling effect on free collective bargaining." Freezing prices to halt inflation, said U.S. Steel Chairman Roger M. Blough, is "like trying to check the rising pressure in a steam boiler by plugging up the safety valve." The real cause of rising industrial prices since the war, charged Blough, is rising employment costs, which now "represent more than 75% of all costs." Furthermore, said Blough, the O'Mahoney bill would "diminish still further the profit incentive," could lead to "the destruction of the greatest industrial machine the world has thus far known."

Blaming Wages. From Raymond Saulnier, chairman of the President's Council of Economic Advisers, came the sharpest opposition to the bill--he called it "untimely and unnecessary"--as well as backing for Blough's view. In the strongest terms yet used by an Administration economist, Saulnier laid the blame for inflation not on corporations but on "increases in money wages that outstrip improvements in productivity. I believe we have tended of late to depart from the historical relation between wage increases and productivity improvements. And if these cost increases cannot be passed on to the consumer in higher prices, they merely create a squeeze on profits that will, over a period of time, seriously impair the nation's capacity for economic growth."

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