A Second Look at Inflation

Abstract

o Concern with inflation is now so pervasive that the Administration can accept, at only slight political risk, an undesirable level of unemployment if the tradeoff is better inflation numbers. Ironically, this fundamental shift in public opinion is probably the most important reason for some optimism about future prospects for inflation. But it is not the only reason: There is more capacity around than some investors realize, and while some of the slack has already shown up in abating rates of price increase, some has not. Take, for example, the oil shortage. There are indications that demand for oil is indeed price elastic: Industry is finding ways to reduce energy consumption significantly and the public utilities are finding it possible to defer construction of new generating capacity. On the supply side, half a dozen OPEC countries are now in balance of payments deficit; shutting down their wells would require a heroic degree of self-abnegation. Meanwhile host governments are again offering incentives to resource development. It now seems likely that crude supplies will last well into the time when alternative energy sources will be available in quantity. The news on the food front is even more encouraging, with short-term prospects for a substantial surplus in such grains as wheat and rice and long-term prospects for slowing population growth and growing political support for a world version of the ever normal granary. There are similar grounds for optimism in hard commodities and in services. We Americans are extraordinarily adaptable. On one hand, we are becoming more concerned with the quality of life and less concerned with material consumption. On the other, we are becoming disenchanted with big government spending. Arthur Burns recently observed: If we are to have any chance of ridding our economy of inflationary bias, we must at least be willing to reopen our economic minds. This is just what we seem to be doing. .