Prices: Still Flying High

And meanwhile, the Carter program to deal with them is in disarray

Last week was one for the record books--literally. From the statisticians at the Labor Department came official confirmation that over the past six months the U.S. has experienced the steepest spiral of inflation it has had in nearly 30 years. Not since the Korean War price explosion of 1950-51 has double-digit inflation gripped the economy so relentlessly for a full half year. But no sooner had Jimmy Carter named his new economic team of Treasury Secretary G. William Miller and Federal Reserve Chairman Paul Volcker than the grim news was out: living costs had spurted up yet again in June, and at just about the same breathless clip at which they have been rising since January.

The June increase in the Consumer Price Index was a shade smaller than the May rise, but it was still a full 1%, enough to push inflation for the first half of 1979 to a compound annual rate of 13.2%, more than twice the pace that prevailed when Carter was elected in November of 1976.

The news put further pressure on the dollar, which in the past two weeks has slumped to eight-month lows against key foreign currencies, sent gold climbing to glittering new heights, and made a mockery of the Administration's repeated assertions that the double-digit run-up in living costs would slacken this summer and abate substantially by year's end.

Much of the June rise was fueled by the continuing surge in oil prices; this helped push up transportation costs during the month at an annual rate of more than 22%, largely because of the rocketing cost of gasoline, which soared at a rate of 92% a year. By contrast, clothing costs declined slightly, while food, the other big-ticket item in the family budget, rose by only 0.2% for the month. Testifying before Congress's Joint Economic Committee last week, Alfred Kahn, the White House's chief inflation fighter, argued that if it were not for the energy situation, inflation "would clearly be out of the double-digit range."

But that is rather like saying that if it were not for overeating, fat people would have no difficulty losing weight. The fact is that the nation's energy and inflation struggles are hopelessly intertwined, and neither can be won alone. Earlier this spring, for instance, the Administration confidently insisted that the rise in food prices would slow sharply during the year. Though many economists still believe this, the Agriculture Department no longer seems so confident just where food prices will end up, and last week conceded that prices would probably climb by about 11% during the year, just about the same as in 1978. Unanticipated large-scale Soviet grain purchases in the U.S. market are part of the reason, but food prices will also rise because of the escalating cost of petroleum products used by farmers and food processors.

Though Carter stressed at his Wednesday press conference that inflation remains the nation's No. 1 enemy, the reshuffling of his economic team did little to change the dismal outlook for victory over it. The increasingly ignored wage and price guidelines program has, in effect, been put on hold while staffers at the Council on Wage and Price Stability try to devise new guidelines for 1980 to accommodate the continuing inflation surge. The disarray in the anti-inflation program is symbolized by the council's present lack of leadership: Director Barry Bosworth has been on a Michigan vacation, preparing to leave the Administration soon whether Carter appoints a successor or not. After two dispiriting years of fighting inflation, Bosworth wants out of Government.

Foreign moneymen generally applauded Carter's choice of New York Federal Reserve Bank President Paul Volcker as the nation's new central banker, but the dollar remained suspect on the money markets anyway. It gyrated unpredictably against the Japanese yen before declining slightly at week's end to about 215 to the dollar, fell more sharply against the British pound, and held steady against the Swiss franc and the West German mark. Reason: the Swiss currency often moves in tandem with the mark, which ran into troubles of its own when the Bonn government released disappointing trade figures for June.

The dollar's one piece of good news was that even as Bonn's trade surplus is beginning to decline, the U.S.'s deficit is shrinking somewhat as well, with the result that fewer dollars are leaving the country. Commerce Department figures released last week showed that U.S. exports have, in fact, been increasing, partly because the weak dollar makes them more attractive abroad; that helped to narrow the June trade deficit to $1.9 billion, down from $2.5 billion in May. The nation's exports will get a further lift from the so-called Tokyo Round trade agreement that was initialed in Geneva in April and finally approved by Congress last week. Among other things, the pact will reduce the nontariff trade barriers that hamper U.S. exports to Japan.

The dollar's renewed instability, which has in the past two weeks cost the Federal Reserve nearly $3 billion in support efforts, was aggravated by some injudicious comments from the affable and vocal Miller, whose readiness to speak out on issues has sometimes caused him problems. No sooner had he been tapped for his new post than he was telling a Washington press conference that the U.S. plans no new dollar-support moves. To foreigners, that sounded uncomfortably like the ill-conceived comments that Miller's predecessor, W. Michael Blumenthal, occasionally tossed off regarding the dollar during his first months in office. At the same session, Miller said that he thought the Japanese yen was actually about 10% underpriced. That comment sent the Tokyo money market into a brief but frantic spin as traders tried to psych out Miller's intentions.

Miller's remarks caused Japanese and European bankers and businessmen to wonder whether the prospective new Treasury chief would be making even more hasty observations that would unsettle money markets once he was confirmed. Fretted one Washington finance man: "I worry that Miller has the potential to be an unmitigated disaster at Treasury. He has a speech impediment--he can't listen."

Miller's Senate Finance Committee confirmation hearings gave every indication of being little more than a pro forma affair. The only potential embarrassment involved his role as the chairman of Textron Inc., the Rhode Island-based multinational, which he left in 1978 to become Fed chairman. During Miller's confirmation hearings for the Fed job early last year, Wisconsin Democrat William Proxmire asked whether he had been aware of possible bribery efforts by Textron employees seeking contracts with the Iranian air force for the company's Bell Helicopter division. Miller emphatically denied any such knowledge and, when the issue was briefly resurrected last week, he repeated the denial. Kansas Republican Robert Dole, a presidential hopeful, said that he would recall Miller for further questioning on the matter if need be. Nonetheless, Miller was expected to be given the congressional stamp of approval, perhaps as early as this week.

The problems that both he and Fed Chairman-Designate Volcker will face in their new jobs are enormous.

Miller in his confirmation hearings conceded that the economy is in a "mild recession," and the Administration now predicts that output will decline by about three-quarters of 1% before rebounding by next spring. Carter has ruled out a tax cut to keep the economy going, and Miller endorsed that position, saying that an across-the-board cut would "unleash a new round of inflationary pressures."

Yet no one can be certain just how the economy will perform, and a sharper than expected decline this autumn could easily change the Administration's mind about the need for a pump-priming tax cut, particularly in an election year.

Such a cut would surely bring more inflation, and more trouble for the dollar too. To bolster the greenback, the Federal Reserve would almost certainly have to push up interest rates, which are already at near record levels. Last week major commercial banks raised their prime rate, the interest that they charge their most credit-worthy corporate customers for loans, to 11 3/4%, a quarter-point below the alltime peak set during the 1974 recession. Further rises in the cost of money would help slow the price surge by curbing the growth of the money supply, but would also risk tipping the economy into a steeper slide. It seems that, in economic policy as well as energy policy, the Administration is simply running out of room to maneuver.

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