As bad as the inflation for January and February may be, a more ominous development is the heating up of inflationary psychology - the expectation that the price situation will continue to get worse.
Inflationary expectations are translated into price and wage increases in anticipation of higher costs, rather than in response to increase already absorbed.
And in the money markets, such expectations are reflected in higher borrowing costs, as investors seek an interest rate premium to take care of what they expect to be a bigger bite from inflation in the period ahead.
Such inflationary psychology, in turn, translates into a higher actual inflation rate as companies, unions, and individuals take some advance measures to protect themselves but in the process add to the spiral.
U.S. Steel Corp., for example, yesterday announced a $10.50 per-ton, or 2.2 percent, increase in its base price on steel mill products to "cover the cost of the new coal labor contract," although no coal price increases have yet been announced. And higher steel prices inevitably will beget higher prices for autos and other manufactured goods.
Just such an anticipatory process is under way in the money markets, where inflation and interest rates are intertwined.
In the last week, interest rates on new issues have climbed sharply and prices on older bonds have been knocked down.
On Tuesday, the U.S. Treasury paid 7.94 percent to borrow $2.51 billion in five-year, one-month notes, the highest yield the Treasury has paid since July 1976 when it begin auctioning notes of this maturity. At the previous auction last October, the yield averaged 7.18 percent.
Tellingly, this development is not in response to any new tightening move by the Federal Reserve Board, which has kept to a placidly steady course since its last surprise turn of the screw in January, but in anticipation that such tightening, along with higher inflation, is in the offing.
"Investors are anticipating higher interest rates during the coming months," said Paine Webber, Jackson and Curtis money market economist Lawrence A. Kudlow. "And in all probability, the over-riding concern on the part of all financial market participants is the fear that U.S. inflation is again heating up."
"Many investors are coming around to the view that the disappointing price data published in January and February is not going to be an aberration, . . . and that over the . . . remainder of 1978, U.S. inflation has now moved to a new zone of 7 to 8 percent," he added.
"As inflationary anticipation rise, investors demand increased inflation premiums," said Kudlow. "This has the practical effect of driving nominal rates higher."
Adding to the dour expectations is investor disappointment at President Carter's unwillingness so far to clearly tackle the inflation problem with some long-term policy, he claimed.
"This disappointment is probably causing the expectation of future inflation - for the second half of 1978 and all of 1979 - to worsen," the analyst noted.
"It's partly anticipation, and it's partly fundamentals," said Henry Kaufman, chief economist at Salomon Brothers, in trying to explain the latest rate rise.
Although money supply growth has been very moderate, reflecting this winter's economy, which was depressed by weather and the coal stride, Kaufman and other market analysts expect a new surge in the money base to occur soon as the economy rebounds. "That may cause the central bank to lift its target on the federal funds rate," he noted.
"There is also the psyhcology," he added. "There are some very fundamental developments saying increased inflation is here. There is the increase in the minimum wage, rising Social Security taxes, farm price support programs, and the depreciation of the dollar. These are all inflation propellants."
At this point, most analysts believe the administration has delayed too, long and may have missed the boat in grappling with inflation. And it now faces the prespect of seriously rising prices at a time when it is proposing potentially inflationary government measures to stimulate a fading ecomonic recovery.
"If we go into 1979 with inflation rising and the economy slowing, you have a real dilemma - typical stagflating - at the same time you have a huge budget deficit," observed William N. Griggs, vice president and economist with J. Henry Schroder Bank & Trust Co.
"What's troubling is that, from a cyclical point of view, we should be near a balanced budget," he said. "If we go into a slowdown, that will hurt tax revenues and further increase the deficit. But if we cut taxes, or expand spending to counteract the slowdown, that adds to the deficit and increased inflation."
All of the concern about inflation has heightened discussion of the posibility of some kind of income policy to control wage and price increases, either through voluntary guidelines or other measures.
But as Kudlow of Paine Webber points out, just the discussion of an incomes policy "rises tremendous uncertainly, and this kind of speculation often leads to anticipatory price increased or to anticipatory increases in interest rates," and also affects wage negotiations.
"The dilemma is that the administration has missed its timing and, in missing its timing, will have to pay the economic and political consequences," said Kaufman.