Going Steady

Defying the economic laws of gravity, prices are falling while the economy as a whole is rising. Last week U.S. producers posted price cuts in industries ranging from autos to nonferrous metals, scrap to gasoline (see following story). Chrysler Corp.'s low-and middle-priced 19625 bowed with reductions averaging 2%; Chevy, Falcon, Rambler and other major models also rolled in with lower tags. The Labor Department's Consumer Price Index, which has risen barely 2 1/2% in the past two years, showed its usual slight August decline (to 128% of the 1947-49 average) as harvest fruits and vegetables loaded the market and temporarily brought down food costs. More important, Labor Department economists predicted that the index would remain fairly constant for the rest of the year.

All this encouraged the growing belief among economic policymakers--from "conservative" Federal Reserve Board Chairman William McChesney Martin Jr. to "liberal" Chief Presidential Economist Walter Heller--that the nation can have prosperity as well as stable prices. If so, that would contradict the inflationary pattern of previous postwar recoveries (see chart). But, as Treasury Under Secretary Robert Roosa says, "this recovery period is different from all others."

Soft Demand, Hard Competition. Missing in the 1961 rebound are the two classic causes of inflation: peak demand and pinched supply. Gone are the shortages of housing or steel that characterized the recoveries of 1949 and 1955, and the big bulges in capital spending that contributed to the price spiral of 1955. This year, manufacturers are operating some 20% below capacity, largely because they added so much capacity in the recent past. And cautious consumers still have their purse strings tied, partly out of persistent fear of unemployment. This apprehension has also moderated the "cost-push" pressures of rising wages. Increases in wages, which averaged 5.1% in 1957, have slipped steadily to 2.5% this year, reflecting labor leaders' new emphasis on winning job-security benefits and other noninflationary fringes instead of straight pay raises.

Slowly--and, in many cases, reluctantly--labor and management alike are beginning to realize that price stability is needed for the U.S. to compete with foreign producers, whose steadily increasing efficiency is being honed by newer machinery and by the success of regional trading arrangements, such as Europe's Common Market (see THE WORLD). Competition from European producers forced Canadian aluminum makers to cut their prices, and that, in turn, led to last fortnight's reductions by Aluminum Corp. of America and last week's cuts by Reynolds Metals Co. Besides being contagious from country to country, price reductions also spread from industry to industry inside the U.S. Prime example: the aluminum cuts put fresh pressure on steelmen to hold their own price line, because aluminum vies with steel in housing, autos, cans and many other markets.

The Coming Test. The Kennedy Administration is also striving to temper prices and avoid the "inflationary" label that has been stuck on recent Democratic Administrations. When John Kennedy aimed his hold-that-price broadside at steelmakers, he well knew that it would reverberate through other industries. Another anti-inflationary force is what one Government economist calls "the somewhat trigger-happy attitude" of the Justice Department's antitrust branch; many big companies are wary of hiking their prices lest they court the attention of the trustbusters.

Not even the most sanguine New Frontiersman argues that inflation is permanently whipped. Most economists predict that within a year the gross national product will spurt to an annual rate of $570 billion, unemployment will fall below 4%, and the whole economy will be straining against the upper reaches of its capacity. Only if prices hold fast in face of such "superboom" pressures will the U.S. be able to celebrate a long-term victory over inflation.

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