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Import prices have been rising especially rapidly because of the weakness of the dollar. When the greenback began falling three years ago, many foreign manufacturers were reluctant to raise their prices on goods sold in the U.S. for fear of losing market share. But in the past few months, their profit margins have been shaved so thin that many of them have hiked their prices. Sony raised the price of its consumer-electronics products about 6% earlier this year. Adding to the inflationary pressure is Americans' powerful thirst for foreign goods. During February the U.S. bought $37.4 billion worth of imported goods, up $2.6 billion from January. As a result, the trade deficit for February increased by 11%, to $13.8 billion, a surprising rise that sent the financial markets into a temporary tailspin.
Still, some economists doubt that growth is too rapid and deny that inflation is about to take off. The gross national product, they point out, expanded at a modest 2.3% annual rate during the first quarter. Concludes Richard Rahn, chief economist of the U.S. Chamber of Commerce: "Fears of inflation are greatly overblown." But that GNP figure, the counterargument goes, may be misleadingly low. It was depressed partly because companies trimmed production to draw down inventories. Besides, consumer spending for the quarter was up 3.8%.
The continuing rise in consumer outlays helped persuade the Federal Reserve Board that the economy was sufficiently strong to absorb an increase in interest rates. It was not an easy decision, though, for Chairman Greenspan. A card-carrying Republican who served as chairman of President Ford's Council of Economic Advisers and worked as an economic adviser to President Reagan, Greenspan is naturally reluctant to do anything that might hurt the chances of Vice President George Bush. But since he took office last August, the Fed chairman has earned high marks for independence and integrity.
A faithful follower of even the most obscure financial indicators ("He knows the guys in the basement of the Bureau of Labor Statistics," says an admirer), Greenspan assumes a centrist position among his fellow Fed governors. Members Manuel Johnson, Edward Kelley and Martha Seger tend to favor supplying sufficient money to permit the economy to grow. Others, including H. Robert Heller and Wayne Angell, are usually more worried about fighting inflation. But it is the Fed's Open Market Committee, its chief policymaking arm, that manages the money supply. Besides Greenspan and the other governors, the Open Market Committee includes presidents of the Federal Reserve Banks, who tend to be inflation watchers.
Fed officials all realize that prices will be easier to control now than six months hence. At the moment, inflation might be contained with moderate interest-rate hikes. Later on, if prices begin to climb swiftly, the Fed might be forced to impose much larger increases in rates. Says John Williamson, senior fellow at the Institute for International Economics: "The lesson all central bankers have learned is that if you don't do what is necessary in the short run, you lose financial confidence, which is very difficult to restore."