Inflation v. Optimism

One of the worries the nation cannot shake is that the quickening economic recovery will be accompanied by--or perhaps cause--a rekindling of inflation. Last week that fear became considerably more chilling. The Labor Department reported that the Wholesale Price Index jumped at a startling compound annual rate of 15.4% in July, paced by higher farm and processed-food prices. Although the index bounces around erratically from month to month (it declined a shade in June), there is no reason to think that August figures will be much better. The latest report covers only part of the surge in grain prices that followed Russian purchases and does not include coffee boosts triggered by a frost in Brazil or a 3-c--per-gal. hike in gasoline.

Healthy Clip. More price rises are being posted too. U.S. Steel announced a series of price changes, effective between now and Oct. 1, that work out to an increase averaging 3.8% on many products (earlier, several companies had tried to raise flat-rolled steel, the kind that goes into autos and appliances, about 9%). American Motors became the first automaker to make public tentative price rises on 1976 models; A.M.C.'s will average 5.8%, or $200 a car. The moves, taken together with aluminum increases going into effect this month, seem to indicate that major corporations are boosting prices to recover cost increases they swallowed during the recession.

Although the consumer price index rose at an annual rate of 10% in June, no one really expects another round of double-digit inflation. But the figures do indicate more inflation than had been anticipated. One top Ford Administration economist, who had been estimating that prices would be rising at a 6% rate at year's end, now privately predicts 7%. Any prolonged new surge of inflation could threaten the recovery itself by making consumers turn cautious and reduce the spending that has been lifting the nation out of its slump.

That is probably more of a threat for 1976 than this year. Economists both in and out of the Administration, including some of its Democratic critics, lately have been voicing a new optimism that the recovery, far from getting off to the sputtering start widely feared a few months ago, is advancing at a healthy clip that should send production up at about a 7% to 8% rate in both the third and fourth quarters. The biggest reason is a predicted tapering off of business inventory cutting. In addition, the statistics--except for those concerning inflation--have been good: unemployment fell from a peak of 9.2% in May to 8.4% in July, and the index of leading indicators in the second quarter registered the highest jump in 17 years. Auto sales and retail sales are generally improving.

There is some fear, however, especially among the Democrats, that the recovery could peter out next year before it really reduces the unemployment rate much. Most indicators could move upward smartly, says Economist Walter Heller, and "all that will be left behind is human beings--the unemployed who won't find jobs on the gentle slopes of recovery." The threat of renewed inflation is only one reason for this worry. Interest rates are rising, discouraging business borrowing. Last week New Jersey Bell Telephone and Con Edison put off bond offerings totaling $155 million and Manhattan's First National City Bank raised its prime rate on business loans a quarter point, to 7 3/4%. Also, the stimulus of the $18 billion of 1975 tax cuts and rebates will be largely exhausted by next year.

Open Mind. Thus the next round of policy debates in Washington, likely to start when Congress returns next month, will be over what additional stimulus the economy may need to keep the recovery on course--without kicking up too much more inflation. Congress almost surely will extend $9.4 billion of the 1975 tax cuts; Alan Greenspan, chairman of the Council of Economic Advisers, has indicated that the Administration has an open mind on the issue. There is some sentiment in Congress that additional tax cuts might be needed.

Liberals are pressing Federal Reserve Chairman Arthur Burns to expand the nation's money supply at something more like the 11 % annual rate of the second quarter than Burns' announced target of 5% to 7 1/2%. The nation's money supply showed almost no growth during July.

Continued bad news on the inflation front could seriously complicate these debates. Treasury Secretary William Simon has been arguing that the nation cannot afford production growth at an annual rate of more than 5% to 6% without causing a new burst of inflation. So far, he has been a lonely voice even within the Administration, but the latest figures might give him some new ammunition.

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