Reducing inflation is one of the principal goals of President Reagan's economic program, but chances are good that inflation will come down later this year and in 1982 -- whether or not the new program works as intended.
Economists with widely differing theories on inflation, and equally different expectations about the prospects for Reagan's program, almost all agree prices will rise less rapidly within a few months. There is a clear consensus that consumer prices will go up slightly less this year than their 12.4 percent jump in 1980 -- assuming there is no new food or oil price disaster.
But there the consensus ends. There is no agreement at all on how great the improvement will be in 1982 and beyond.
The monetarist economists expect dramatic improvements in inflation as the Federal Reserve continues to rein in growth of the money supply. Federal Reserve intentions to do just that were underscored last week when officials at the central bank endorsed the "assumption" published as part of the Reagan plan "that growth rates of money and credit are reduced steadily from the 1980 levels to one-half those levels by 1986."
Most of the economists who regard themselves as supply-siders also are looking for a large drop in inflation by next year. They say Reagan's tax and spending cuts, along with restraint at the Fed, quickly will lower actual inflation rates as people's expectation of future inflation is reduced. That effect will almost immediately be reinforced, they claim, by such supply-side effects as higher levels of business investment and more rapid productivity gains, which will help cut inflation further.
More eclectic economists generally are less sanguine. They also incorporate likely Federal Reserve actions in their assessments, but stress that tight money and other factors will have contributed by the end of 1982 to three successive years in which the nation's unemployment rate has been above 7 percent. That much slack in labor markets, and the concomitant idle factory capacity, will restrain both wage demands and the ability of producers to raise the prices of the goods they sell.
Otto Eckstein of Data Resources Inc., falls into this group. "Inflation stands a good chance of significant improvement," he says. "Instant oil decontrol has front-loaded the inflation process of the president's term, and the enormity of the 1979-80 OPEC increase gives President Reagan a good chance of avoiding the third round of OPEC trouble during his first term.
"While a limited wage acceleration still lies ahead with only small productivity offsets, and industrial prices are likely to stage a round of catch-up increases, the dollar will be aided by high interest rates, monetary restraint and conservative policies," he explains. "As a result, there is a pretty good prospect for a reduction of the inflation rate from the inherited 12 percent to single-digit figures."
But Eckstein's best guess for consumer price inflation in 1982 and 1983 is 9.6 percent, only narrowly below double digits.
The Reagan administration, in a compromise between some of its supply-side economists and those using more conventional analytical techniques, projected that inflation -- as measured by the GNP deflator -- would drop from 9.8 percent in 1980 to 9.5 percent this year and 7.7 percent in 1982. Because of an assumed drop in interest rates, including home mortgage rates, the decline in consumer price inflation is even greater. The CPI, up 12.4 percent last year, is forecast to go up only 10.5 percent in 1981 and 7.2 percent in 1982.
However, various administration spokesmen last week stressed in their appearances on Capitol Hill that they regarded their estimates as "conservative."
Some monetarist economists, such as Robert Weintraub of the congressional Joint Economic Committee, agree. They think the anti-inflation payoff from slower money growth will be much more dramatic than the administration in the end decided to predict.
On the other hand, Alan Greenspan, the former chairman of the Council of Economic Advisers who has had a significant role in developing the current administration's economic plan, is not quite so optimistic about 1982 as the Reagan economists. Last week he predicted that the GNP deflator would rise 9.3 percent this year and 8.3 percent in 1982.
Greenspan believes inflationary expectations will indeed fall as Congress approves many of Reagan's proposals and the Fed slows money growth. But much of the improvement in inflation in 1982, in his view, will be the result of the combination of smaller increases in wages and faster productivity growth as the economy recovers from a near-recession this year.
Rudy Penner of the American Enterprise Institute, chief economist for the Office of Management and Budget in the Ford administration, is fully in sympathy with what the administration is trying to accomplish but cautions, "They could have a much rockier road out there than they expect."
Penner expects inflation to be lower but not by much anytime soon. Achieving substantial reductions in inflation, even if Reagan's program is passed by Congress, could take years, in his opinion.In particular, Penner fears that the Fed's tough monetary stance will squeeze real economic activity -- not inflation."Any realist would say it will be real growth that will give, not inflation," he says. And getting inflation down "could mean unemployment hanging in the 7 percent to 8 percent range for quite a while."
Even the administration's economic scenario has unemployment still at 7 percent at the end of next year. All this slack in labor markets can help slow the rise in wages, particularly in some key industries, if the administration avoids putting a "floor" under pay be giving in to demands for protection from foreign competition, says Marvin Kosters, another AEI economist.
Kosters says that wages in both the steel and auto industries have gotten far out of line with average wages in manufacturing and that workers in those industries have lost jobs as a result. "The administration ought to be fostering needed adjustments, not providing protection from foreign competition," he declares. In the case of Chrysler Corp., of course, such an adjustment in the form of a wage freeze has been accepted by the United Auto Workers.
So far, the administration has done nothing to discontinue the "trigger price" scheme set up by President Carter to limit imports of low-cost foreign steel.Also it has neither opposed nor supported proposals to limit auto imports, particularly from Japan.
With the three-year collective bargaining agreements in steel and autos up for renewal in 1982, some economists expect poor preformances in those industries to produce much smaller wage increases in the new contracts. The rubber workers contract also is up next year, and that industry, too, is suffering economically.
But even with unemployment hovering near 7.5 percent for nearly a year, the Labor Department's hourly earnings index still rose 10 percent in the 12 months ended in January. That is a clear measure of the stubbornness of the nation's inflationary problem and the magnitude of the task confronting the Reagan administration.
The enormous disparity among what economists expect the administration's success to be is a further indication of the uncertainty that remains about how that problem can be tackled successfully.