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Inflation Isn’t a Sure Thing

May 10, 1988

NEW YORK (AP) _ The National Chamber of Commerce has issued an economic policy paper challenging the widespread fear that the economy is expanding into a period of dangerously rapid inflation.

It calls the growing references to inflation by economists, bankers and investment advisers a phobia based in part on the assumption that economic growth per se is inflationary, and partly on misreadings of the evidence.

It states that while the inflation rate could grow this year and into 1989, it is unlikely that anything similar to the double digit inflation of the 1970s lies in the future.

In fact, says Graciela Testa-Ortiz, forecast director of the economic policy division, the possibility exists ″that the national economy has enough momentum to continue to grow with a declining rate of inflation.″

Inflation fears have intensified recently for several reasons, including a declining unemployment rate, rising rates of factory utilization, a lowering of the dollar’s trade value, and increases in food and housing prices.

Among the most oft-cited evidence of an upturn in inflation was the sharp increase in monthly consumer prices of 0.5 percent in March, compared with a 0.2 percent rise in February, and the graphic depiction of that increase on widely published bar charts.

The Chamber challenged such usage of charts, however, by showing that inflation, plotted quarterly instead of monthly, shows steady declines from the first quarter of 1987 through the first quarter of 1988.

″When the quarterly data are plotted, the real inflation trend is revealed, and it is starkly different than the one portrayed,″ it said, adding:

″These numbers are not a fluke or a statistical construct; the decline in inflationary pressures as measured by the CPI is corroborated by the implicit deflation for gross national product, a broader measure of inflation.″

Many analysts posit that economic growth is inflationary because it is assumed there are strict limits to economic growth, with shortages and inefficiencies developing as industries reach productive capacity.

But, the paper contends, such reasoning assumes plant capacity is a given and cannot be changed, whereas ″the truth is that American firms have been expanding their capacity to produce since the recovery began.″

Moreover, it continues, wage increases that often accompany a declining jobless rate have been muted by foreign competition. In addition, output per hour per person has also risen, further alleviating inflation pressures.

The paper counters the argument that a rise in oil prices is likely by arguing that lower oil prices are just as possible. ″The reality of the oil picture is one of plentiful supplies,″ it says.

While many forecasters say the dollar’s lower value will eventually force inflation into the system, mainly because foreign producers may have to raise U.S. prices, the paper notes that so far such increases have been small.

The paper contends the major inflation concern relates to the Federal Reserve. ″It is the rapid increases in the money supply that causes inflation to rise, and its volatility which thwarts growth.″

It calls for stability and moderation in the growth of the money supply, and a de-emphasis on month-to-month statistical evidence and sudden reactions to them, in favor of longer-term trends.

End Adv PMs Tuesday May 10

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