PRICES: A Galloping New Inflation of Fears

A galloping epidemic of inflation jitters has spread through the economy in recent weeks. Public fears of runaway prices have been stirred by the recent leap in fuel, food and other living costs caused by the winter’s bitter cold and crop-killing drought in the West. Businessmen and investors also worry about the back-to-back budget deficits (totaling $125 billion this year and in fiscal 1978) that President Carter has estimated as one result of his program to stimulate the economy. Irwin L. Kellner, vice president of Manufacturers Hanover Trust, fears a return to consistent double-digit inflation before the end of 1978; Albert H. Cox Jr., president of Merrill Lynch Economics Inc., sees a 40% chance of inflation reaching about that speed late in 1977.

Administration economists, and a good many outside experts, regard such views as alarmist. Still, the widespread talk about inflation has already hurt the financial markets. Stock prices in the first two months of the year fell 7% and trading volume declined by 25% from a year earlier. The bond market has been sagging, too, causing a rise in interest rates. Last week, for example, double-A utility bonds were selling at a yield of 8.35%, v. 7.8% in late December.

How valid are the new jitters? Certainly, recent statistics have not been cheering. Led by climbing food and fuel costs, the January Consumer Price Index rose at an annual rate of 10%, the biggest monthly jump in a year and a half. No one expects that hectic pace to continue through the spring, but energy costs are certain to go on rising this year. Moreover, prices of a number of commodities—cocoa, cotton and most notably coffee—are climbing.

Despite these unsettling signs, many economists believe that their more nervous colleagues are overreacting. Harvard Professor Otto Eckstein, a member of TIME’s Board of Economists, estimates that the basic inflation rate remains at about 5½%, and “you add or subtract, subject to how hard you stimulate the economy and how lucky you are about weather and fluctuations in world oil prices.” Eckstein forecasts a 6.4% rise in the Consumer Price Index this year—worse than the 5.8% of 1976 but a long way from double digits. Adds John Bunting, chairman of Philadelphia’s First Pennsylvania Bank: “The more conservative people are rekindling fears of inflation because they think that it is the only way to stop Congress from spending more money.”

Little Chance. Administration officials insist that since U.S. factories are operating at only about 80% of capacity and 7.5% of the labor force is unemployed, there is little chance that budget deficits will generate the excess demand that kicks prices up rapidly, at least through 1978. By then, Government economists expect to begin whittling down the deficit by a combination of budget cuts and increased tax revenues to be generated by a healthily expanding economy. In addition, Administration officials figure that the deficit for fiscal 1977 could wind up as much as $10 billion below the $68 billion officially projected. Reason: the spending shortfalls that first showed up in the budget last year are continuing. No one is certain why the Government is spending less than it had expected. One guess is that agencies had overestimated how rapidly the prices of the things they buy would rise, and asked for more money than they can spend in the time allotted.

The strongest reason for fearing accelerated price rises is that the Administration has not yet evolved anything but the most nebulous anti-inflation strategy. It has ruled out controls, standby controls or even comprehensive wage-price guidelines. Presidential aides promise to have an anti-inflation plan ready in a month or two. The indications are, however, that the Administration will do no more than set a highly general goal, call in labor and business leaders for pep talks and hope that they will restrain wage and price boosts.

Whether such gentle evangelism will convince business, labor and the public that Carter is serious about holding down prices is open to question. Yet the need for reassurance is urgent. As Treasury Secretary W. Michael Blumenthal remarks: “We are at the point where we can talk ourselves into more inflation.”