Inflation at the Top

Inflation, as a topic if not a reality, was on just about everyone's mind and tongue last week. Treasury Secretary Henry Fowler saw "disturbing signs," while Commerce Secretary John Connor and Labor Secretary Willard Wirtz had words of reassurance. Lyndon Johnson asked his top economic advisers to come to the Texas ranch soon to talk about the economy, but his aides insisted that he was not really worried.

There is certainly some reason for concern about inflation. The economy is humming along at only 2% (or $15 billion) away from what the President's Council of Economic Advisers considers its full potential. It faces a doubled federal budget deficit of $7 billion or $8 billion this fiscal year as a result of stepped-up spending for the Viet Nam fighting. The Bureau of Labor Statistics reported last week that consumer prices edged up again in October to a record 110.4% of their 1957-59 level, bringing the gain in the past year to 1.8%. Unemployment fell to an eight-year low of 4.2% in November, just a bit away from what the Administration considers virtual full employment. Still, the U.S. does not yet have classical inflation--a sustained price rise of more than 2% a year. Industrial production is rising faster than the supply of money required to absorb it, and wage gains have stayed comfortably ahead of price increases (see chart).

Johnson's Law. Taking aim at inflation, however tentatively, the Administration shone the spotlight on business. In a telephone address to the 65-man Business Council, the President forecast record prosperity without inflation in 1966, made it clear that he expected businessmen to exert price restraint to match the effort of servicemen in Viet Nam. Said the President: "We can produce the goods and services we require without overheating the economy." Addressing the meeting of the National Association of Manufacturers a few days later, Richard Nixon evoked many businessmen's feeling that they are bearing the main burden of holding off inflation. In dealing with inflation, said Nixon, the Administration "has tried to replace the market's law of supply and demand with Johnson's law of comply and expand--business complies and Government expands."

A big part of the debate over inflation centers on whether there should be a boost in interest rates, the classical economic medicine. Bankers have been pressing for a rise, and last week the biggest banker of all, President Rudolph .A. Peterson of the Bank of America, stated their case: "A small rise in rates would not seriously dampen American business. On the contrary, it could well contribute to balanced and continued expansion of our economy." The Administration, on the other hand, has opposed any interest rise because of fears that such a rise might cut off the expansion by discouraging investment.

New Plan. In place of traditional monetary tightening, the Administration has so far tried a new, direct approach to cope with inflation. It has used a number of flexible weapons, including more stress of the guidelines and on the use of stockpiles to restrain prices. Johnson's economic advisers have been counting on such measures to hold the line for the next few months until the upward pressures on the economy can be relieved by growing plant and equipment expansion.

With that, Washington has hoped to avoid reaching for stronger anti-inflation weapons, such as raising the discount rate or increasing taxes. The plan may work. But if the new approach to inflation does not do the job in the next few months and the economy continues to heat up, Lyndon Johnson's advisers may be forced to resort to more classical means.

This file is automatically generated by a robot program, so reader's discretion is required.