Inflation: Unlikely

To hear the growls of the economic bears, the U.S., having just turned the recession around, now stands tottering on the brink of something disastrous called "inflation." But does it? The U.S. could indeed have serious inflation if fiscal irresponsibility at Government levels piled up national debts heavier than the economy can absorb. It might also have inflation if the wage spiral got out of hand, or if capacity to produce fell so far short of demand that prices suddenly shot up by 10% or 20%. It will not have "inflation" by any sensible definition of the word so long as the U.S. can manage its debts and prices rise by 1% or 2% each year, for as economists now know, such gently rising prices are expectable--and even necessary--in a growing economy.

Last week, in a calm, sober study, Roy L. Reierson, vice president and chief economist of Manhattan's Bankers Trust Co., concluded that the bearish worries had far outrun the possibilities. "There is some feeling that the American economy may, within the next few years, be engulfed by a speculative, inflationary burst involving a flight out of dollars and money assets and into tangible property, gold or equities. The odds do not seem to favor such a prospect at this time."

Though the federal deficit will continue to be large, possibly running to $10-$12 billion next year, it will still represent less than 3% of the gross national product, hardly a harbinger of runaway inflation. The bothersome rise in the wage-price spiral will be slowed by several deflationary factors: widespread overcapacity in basic industries, a squeeze on profit margins, no recurrence of a labor shortage as working-age population rises. What the bank expects is a relatively stable growth pattern over the next five years, with prices rising a modest 1% or 2% each year. Any further acceleration in prices could be crimped politically by Government controls or higher taxes. "Thus," concludes Economist Reierson, "unless the U.S. adopts fiscal irresponsibility as a way of life or, of course, we become involved in another war, an inflationary binge appears unlikely."

The Federal Reserve Board last week demonstrated the kind of fiscal responsibility that Economist Reierson was talking about. Deciding that it was time once again to lean gently against the economic winds. FRB gave the San Francisco Reserve Bank permission to hike its discount rate from 1 3/4% to 2%, the first such credit-tightening boost in eight months. The other eleven Federal Reserve banks will probably follow suit soon, thus signaling that 1) the Fed agrees that the recession is over, and 2) it is on guard to make certain that the recovery proceeds in a sound, orderly fashion.

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