Inflation Grows Worse

And the Government starts to view itself as the villain

At any Washington, D.C. cocktail party where economists are present (which is most of them), the main topic of fretful conversation these days is inflation. It is a strong tide that may momentarily ebb with an occasional optimistic statistic, only to rise again when new reports are issued. Echoing almost all the experts, as well as the public opinion polls. Federal Reserve Chairman G. William Miller told the Senate Budget Committee last week that inflation is the nation's No. 1 economic problem. He also warned that it is growing worse.

That assessment is shared by Treasury Secretary W. Michael Blumenthal and Charles Schultze. chairman of the Council of Economic Advisers, who are taking little comfort from the fact that unemployment dropped to a three-year low of 6.1% in January. Last week they went so far as to urge President Carter to take some form of action. The basic, underlying rate of inflation has been stuck since mid-1975 at 6%, already an unacceptable figure. A 15-page memo circulating within the Administration warns that the base rate is about to accelerate. Can double-digit inflation be far behind?

The inflationary rise is caused by price-boosting forces almost everywhere in the U.S. economy. As Daniel Brill, the Treasury's chief economist, told TIME Washington Correspondent George Taber. "A lot of little things are breaking wrong. It's a tenth of a point here and a tenth of a point there." The problems:

COAL. Administration officials are concerned that any coal settlement will worsen the wage spiral. Says Brill: "There are contracts for 740,000 construction workers coming up between March and June. I just hope they don't read the papers, because a lot of their wives are going to be around reminding them of that 38.8% [prospective coal wage-and-benefit increase] over three years." In addition companies will also bid up the price of nonunion coal, switch to higher-priced fuels or make up for lost work by scheduling costly overtime when the strike ends. Those moves could boost inflation by as much as one-tenth of 1%.

COLD WEATHER. Spring arrived Monday at 6:34 p.m., but the aftereffects of record-breaking cold and snow will continue to push up prices. Main reason: reduced food supplies caused by transportation snarls. The inflationary impact will be over by year's end, but the residue--about a tenth of a point on the inflation rate--is expected to hang on until the beginning of next winter.

THE DOLLAR. Every time it drops on foreign exchange markets, U.S. inflation goes up a notch. Prices of imported goods rise, and so do those of the U.S.-made products that compete with foreign merchandise. Example: the prices of Japanese-made Hondas and Toyotas. German-made Volkswagens, even models produced abroad by U.S. makers (like Ford's Fiesta and Dodge's Colt) all have risen since October. Administration officials now say that the dollar's decline will add one-half to three-quarters of a point to the inflation rate this year.

NEW LEGISLATION. Increases in the minimum wage and Social Security taxes were known to be costly, but the impact was not appreciated until January. Those raises alone could add a full point to the inflation rate for the year. Prices at fast-food restaurants will go up because they employ many workers at the minimum wage. Says a high official of the Government's Council on Wage and Price Stability (COWPS): "This year will destroy once and for all the argument that the minimum wage is not inflationary."

The realization is growing that the most important new promoter of inflation is the Government. Not intentionally, to be sure, but as a result of tax, spending, regulatory and trade measures taken with political purposes in mind. That is an old thought to conservatives; it is being accepted now by many liberals who once scoffed at it.

Economist Edward Denison of the liberal-oriented Brookings Institution calculates that Government regulations covering everything from shipping to the environment lowered output per man-hour in private industry by 1.8% between 1967 and 1975. One COWPS member estimates that regulation adds from .5% to 1% to inflation, and that new regulations this year will raise business costs by $5 billion.

What to do? President Carter at budget time talked up a "deceleration" program of urging union and corporate leaders to hold wage-and-price boosts below the average for the past two years. This idea seems dead, killed by the coal strike and the cost of settling the walkout. The Administration is considering a series of other measures. Among them: holding pay raises of 1.4 million federal employees and 2 million military personnel to only 5%, rather than the 6% planned in Carter's fiscal 1979 budget; having Carter urge state and local governments to cut sales and property taxes; increasing meat imports to hold back rising prices of food; calling a meeting of top executives of the 50 or so largest U.S. companies at which they would be asked to accept a one-year freeze on their own salaries, which would give them moral authority to ask for restraint by workers.

Not many of these ideas will be accepted. Indeed, officials fear pending decisions may go the wrong way. The Administration, for example, may restrict imports of Citizens Band radios, which will push up prices. Postal workers are expected to demand a substantial pay increase when their contract expires in July; the Government may yield. Carter has refused to support a congressional move to roll back huge increases in Social Security taxes scheduled to start next year. And the President so far has tended to view regulatory decisions in an isolated, case-by-case way, rather than weighing their inflationary impact. Further, he seems to have no stomach for Lyndon Johnson-style jawboning of labor and business. The inflationary genie may be out of the bottle.

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