Monday, Apr. 30, 1990

Blast From The Past

Banished for nearly a decade, the scourge of stagflation, with its fast- rising prices and dismal economic growth, is threatening the U.S. again. Inflation fighters, chief among them Federal Reserve Chairman Alan Greenspan, had hoped that the current combination of relatively high interest rates and sluggish growth would dampen price increases. But the Labor Department said last week that consumer prices rose 0.5% in March, bringing the annual inflation rate in the first quarter to 8.5%, the fastest pace in nearly eight years. "What's so scary about the number is that it's going to take more pain and punishment to bring inflation down," says Allen Sinai, chief economist for the Boston Co. Economic Advisers.

The battle to tame inflation has been exasperating because the chief weapon, tighter credit, has so far managed only to weaken the economy. In general, forecasters believe the U.S. economy will grow less than 2% this year. The housing industry, which has been depressed for two years, took another downward turn last month, when new home construction fell 9.3%, to an annual rate of 1.3 million units.

Most economists see the hotbed of inflation in the service sector, which accounts for 70% of the nation's economy. Health-care costs rose 0.8% in March alone and nearly 9% during the past twelve months.

Inflation's new strength and the economy's limpness leave the Federal Reserve with almost no room to make adjustments. Easier credit would worsen inflation, while tighter money could bring on a recession. As a result, many economists have called on Congress to help cool inflation by cutting the budget deficit. That may be an impossible dream, but the specter of stagflation may give Congress one more good reason to do the responsible thing.

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