Prepping for Stage Two

A tough call coming up for Carter on inflation

A bittersweet flavor laced the economic news last week. On the good side, the consumer price index, after racing ahead at an average annual rate of 10.8% in the three months ending in June, slowed down a lot in July, chiefly because of a drop in food prices. On an annual basis, the index rose only 6%, the smallest increase since December. Unemployment also dipped, falling to 5.9% in August from 6.2% the month before. The bad news was that after months of steady improvement the nation's trade deficit in July came in at a scary $2.99 billion, nearly double the $1.6 billion gap in June.

Though the Administration has raised its inflation forecast for the full year from 7.2% to 8%, it maintains that the worst of the price surge is past. Yet President Carter is planning to take a tougher stand against rising prices, something that would go beyond his less than effective voluntary program but would not, the White House insists, include any form of wage-price controls. Carter's top economic advisers will begin poring over various proposals for a "Stage Two" anti-inflationary program this week. None of them are yet firm and as one Administration planner groaned: "All the alternatives are lousy."

One idea calls for setting up numerical standards similar to the guidelines used in the early 1960s to restrain wages and prices. Other steps under study: two kinds of TIPS or tax-based income policies that must be passed by Congress. One was devised by Economist Arthur Okun of the Brookings Institution, the other by Henry Wallich, a member of the Federal Reserve Board. Okun's plan would give tax credits to workers and employers who hold down wages and prices. Wallich's idea is to impose tax penalties on those firms granting inflationary pay boosts or setting excessive prices. Both plans would be cumbersome but, as public frustration over inflation grows, some kind of TIP seems more and more feasible.

On the trade front, the most disquieting aspect of the July deficit is that it occurred despite a drop of 4.5% in oil imports. Most of the increase in the deficit came from imports of automobiles, machinery and other goods. Though the import flood is expected to ease off eventually, this year's trade deficit will probably hit a record $30 billion or more. The bad trade news sent gold prices up and all but kayoed a brief comeback of the dollar on foreign exchange markets.

To strengthen the dollar and weaken inflation, the Federal Reserve Board may be forced to raise interest rates still more. The cost of short-term credit has already been kicked up nearly 20% since January; last week major banks lifted their prime lending rate to businessmen a quarter of a point to 9 1/4%-- the highest level since February 1975. A really tight credit squeeze could tip the economy into recession, but right now the outlook is for interest rates to peak later this year and begin to drift down in 1979.

Personal income and production have been very strong this summer but the index of leading indicators--which is sup posed to foreshadow business trends--turned down in July, the first drop since January. Some slowdown is to be expected, given the high 8% growth rate of the second quarter. Private economists expect growth to slow to a bit less than 3% in the fourth quarter and just over 2% in next year's first quarter and 1% in the second quarter. That adds up to a slump--but no recession. Then the gen eral expectation is for a modest rebound in the second half so that growth for all 1979 would come in somewhere between 2 1/2% and 3 1/2%.

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