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April 12, 1995
This week's bond market showed every sign of a top in rates, one likely to hold until the next payroll follies on May 3. Thirty year mortgage rates peaked at 8.375% at "zero and zero," and are back down, close to 8.25% this morning.
The ultimate source of all the bond market worry is inflation, and the March reports were anticipated with more than normal concern. Some concern turned out to be justified, but not the early week hysterics. The producer and consumer price indexes jumped .5% and .4% respectively, but the "core" rates held to .1% and .2% gains.
This morning's retail sales report added to the general relaxation: March sales gained only .1% against expectations of a one percent rise.
It's been so long since there was any inflation worth writing about that a refresher course is more history than current affairs. Kind of like a remembrance of Gerry Ford's golf game.
There are two kinds of inflation: wage-pulled and cost- pushed.
By far the more common, and deadly, wage- (or
"demand"-) pulled inflation is the classic "too much money chasing too few goods and services." Its cause is almost always monetary, meaning a central bank ("Fed") has been too easy with the printing press. Less often, through some quirk in the labor market, or political foolishness, wages grow faster than productivity, and the excess results in inflation.
Wage-pulled inflation is deadly because it is intractable. Once a nation enters a "wage-price spiral," citizens demand ever-larger increases in wages with which to pay ever-higher prices. In 1996, there is not the slightest sign of a wage-price spiral.
Yet.
The best, most gruesome examples of cost pushed inflation were the oil price shocks of 1973 and 1979. Oil prices rose because of OPEC, not a too-easy Fed.
The minor uptick in inflation this year is of the cost-pushed variety, showing up in the differential between the nominal and "core" rates. Strip out food and energy costs, and there is no inflation at all.
However, cost-pushed inflation has a nasty habit of turning into a wage-price spiral, unless painfully contained by Fed action. For example, in 1973 the Fed tightened hard to prevent the oil price increases from rippling through the whole economy, which resulted in a nasty recession, held inflation to 4%, and caused the defeat of poor old Gerry.
In 1979, already in wage-price trouble, a sleepy Fed allowed the ripple. 12% inflation removed poor old Jimmy, and ultimately resulted in a very long, deep recession.
If commodity prices increase their cost push this year, the Greenspan Fed will pick the 1973 method.
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