Signs of a Turn

There was no excessive jubilation as yet in the White House, no cheering in the ornate board room of the Federal Reserve. But last week there were some promising signals that the momentum of inflation may be slowing. Policymakers--who have waited with growing impatience for the classic devices of high taxes and tight money to take effect --at last had some cause for optimism.

First, the Labor Department reported that the consumer price index rose at an annual rate of 3.8% in May. That was only half as much as April's advance; and it was the second month in a row that the rate of increase has declined. Next the Commerce Department disclosed that its index of twelve leading indicators of the economy dropped fractionally in May, a sign that overall demand and production may level off in the months ahead and eventually lead to price stability.

Flat Sales. "I've been looking for this kind of evidence for some time now, but I still want another month before I take out the trumpet and start to blow it," said William Butler, vice president of the Chase Manhattan Bank. His caution was echoed by other business and Government economists. The leading indicators, however, reveal a significant slowdown in construction, commitments for new plant and equipment and general investment activity. Retail sales have flattened in recent months, and the actual volume of sales--discounting inflation--has not risen at all over the past year. The evidence suggests that consumer demand, which has been partially responsible for inflation, is moderating. And no wonder. The U.S. is currently in the midst of the longest period of non-growth in real take-home pay since World War II.

To the worker who has seen his weekly purchasing power decline in the past year from $78.47 to $78.23 in May, the best news is the prospect of increasingly stable prices. Government economists figure that the rate of rise in living costs may go up in the next few months because of seasonal factors, but that the index will be advancing at a fairly steady 4% annual rate at year's end. They expect the Government's anti-inflationary moves to have worked their restraints on prices by then, if not earlier.

Criticizing Nixon. Any cooling will be particularly welcome to President Nixon, who is beginning to bear the blame in the public's mind for the inflation that he inherited from the Johnson Administration. Louis Harris reported last week that only 32% of the people in his poll commended Nixon's handling of inflation, and 46% criticized it. The survey made clear that Americans believe that inflation has become a personal crisis for everybody, but few are willing to endure real personal sacrifices to curb it. By a vote of 79% to 6%, people who were polled thought that the most urgent step necessary is to cut federal spending--even though few individuals would be wiuirg to reduce any Government spending that reaches their own pocketbooks. Surprisingly, those polled favored wage-and-price controls by 50% to 26%; practically every economist has damned such controls as unworkable. By a big margin, the respondents also want to do away with the surtax and tight money, though economists on all sides believe that those measures are needed.

The Federal Reserve Board moved again last week to curtail the credit supply by proposing reserve requirements for Eurodollars. Board members want to stem the flood of those dollars that banks have been importing from European branches by the billions and then lending out. The Federal Reserve has misread the economy twice in the past three years and has prematurely expanded credit. It is not likely to do so again until the signs are unmistakably clear that inflation has been reversed. The latest readings of the consumer price index and the leading indicators suggest that what the Federal Reserve and the Nixon Administration have done so far is right. Now the Administration can demonstrate political courage by continuing on course, and Congress can do the same by maintaining the surtax.

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