THE NEW INFLATION: The Least of Three Evils?

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To U.S. economists the biggest puzzle today is the "new inflation," so called because it flies in the face of all their classical theories about the sources of inflation. Traditionally, inflation is caused by excessive demand for goods in short supply. But many consumer prices today are rising in the face of softened demand and below-capacity production in such key industries as steel, autos, appliances. To describe this new phenomenon, economists have coined a new phrase: "cost-push" inflation. Some go on to contend that price boosts, such as the recent steel price rise, are caused primarily by the push of labor's wage demands. But is labor really to blame?

Most economists are well aware that the problem of inflation is far too complex to be laid at the door of any one group. Dozens of factors contribute, such as high Government spending, support prices for farmers and other subsidized groups, and a faster turnover of loan funds to offset the Federal Reserve Bank's tight-money policy. And in a new study, the Bureau of Labor Statistics points out that prices have actually led wages upward during most of the postwar period.

The first burst of postwar inflation came when pent-up demand and wartime savings caused such a scramble to buy that shortages turned up everywhere, and most businessmen cashed in by raising prices. Then came the Korean war, and once more a scramble for materials and goods sent prices soaring. Wages were slow in catching up. In fact, after General Motors set up the first automatic "annual improvement factor" increase in wage contracts in 1950, Charles E. Wilson, then G.M. president, said: "It is not primarily wages that push up prices. It is primarily prices that pull up wages." After 1952, wages began to catch up to prices, while the cost of living held steady. In the third round of inflation, which started in 1956 because of heavy business spending for expansion on top of heavy spending by Government and consumers, wages galloped up neck and neck with prices.

The upward trend of wages was due not only to the scarcity of labor but also to the spread throughout industry of the G.M. idea of automatic increases. This ran counter to traditional business practice because it placed emphasis on a long-term rise in productivity and kept wages rising even when productivity temporarily stopped rising (as it did last year) or business temporarily slackened (as in steel and autos this year).

For their part, many businessmen became wedded to the idea of a continually expanding economy. Under such circumstances—and with money tight—they decided on a long-term policy of financing more of this continuous expansion out of profits instead of through stock and bond issues. Disregarding temporary conditions of supply and demand, they began to set what Senator Kefauver and economists such as Edwin Nourse, ex-chairman of the President's Council of Economic Advisers, call "administered prices"—prices that are set to achieve a predetermined profit level that will defray not only wage increases but also most of the expenses of new plant expansion.

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