Harken back to the halcyon days of the 1960s. Inflation then was measured in double-digit decimal points.
Still, the Kennedy and Johnson administrations, like all those to follow, found it politically expedient to take public, albeit meaningless, steps to fight rising prices.
Americans have inveighed against inflation for the better part of two decades--and for good reason, since rising inflation can cause lack of confidence in government and financial instruments and insensitively hack away at the weaker members of society who cannot protect themselves.
But while publicly beating their breasts, the majority of businesses and individuals have learned to cope with inflation.
Those with old, fixed-term, low interest mortgages have been able to use their money to benefit from money market mutual funds. Workers often protected themselves with cost-of-living escalators in contracts. Businesses passed along higher costs as higher prices. Governments delighted in tax revenues that rose more swiftly than the rate of inflation because tax rates were higher on higher incomes.
Now, as prices are slowing down sharply, many Americans are learning that they have a vested interest in continuing inflation. For some, the side effects of falling prices may appear to be worse than the consequences of inflation.
Despite the administration's claims that the sharp slowdown in inflation is attributable to its policies, most analysts are skeptical. Much of the slowdown is because of the recession. But the evidence is accumulating that the abatement is more permanent.
The reasons are varied. In some cases, such as automobiles and housing, prices rose so fast--even measured against the general price level--that demand has declined. In the case of oil and gas, prices rose so fast the demand declined and high prices evoked new supplies (although fragility in the Middle East could change the oil picture overnight).
A sudden, or not so sudden, injection of competition in many industries has helped. Auto makers and steel companies cannot pass along all their higher costs because of foreign competition. Air lines and truckers face new domestic competitors as a result of deregulation.
If companies can't raise prices, they must reduce the costs of production or go out of business. That process is painful for suppliers and producers alike. Automobile manufacturers demand price reductions from their suppliers. The United Auto Workers, with hundreds of thousands of its workers on layoff, renegotiates contracts. Although the UAW and General Motors failed to renegotiate, GM made the startling announcement during the abortive talks that whatever savings it realized it would pass along in lower prices.
Auto workers don't like lower wages or benefits or changed work rules. GM investors would have preferred to keep some cost savings in the profit column.
Teamsters, rubber workers and pilots--who once had as tight a lock on airlines as printers did on publishers 20 years ago--are beginning to recognize the reality that they cannot continue to boost their incomes and expect their employers to remain profitable.
Homeowners may face the rudest shock of all. During the 1960s and 1970s, the home looked like the impeccable investment. Housing prices outpaced the rate of inflation and more and more families jumped on the bandwagon, sinking more and more of their disposable income into housing to cash in on the bonanza.
The high level of mortgage rates is generally blamed for housing's difficulties and there is no doubt that high rates are part of the problem. For years, federal price controls on savings forced small consumers to subsidize cheap mortgages for homebuyers. Now all but the smallest of savers can find outlets for their money that pay them rates of interest to keep pace with inflation--much like homebuyers' incomes kept pace with the cost of living.
The price of the house, however, remains the critical problem, like the price of a car. At today's level of interest, a 20 percent reduction in interest rates does not lower the monthly cost of owning a home as much as a 20 percent reduction in selling price does.
Home sellers, understandably, would like to see the price reduction on the borrowing side. Depositors, many of whom have 9 percent mortgages, would prefer to hold on to their new-found high yields.
Although business leaders normally are the most vocal advocates of anti-inflation policies, they, too, will find a vested interest in rising prices. It was easier to grant wage increases, pass them along in higher prices that weren't noticed too much because most other prices went up as well. Inflation also boosted profits. The increase often was illusory, but it still looked good on balance sheets. Many businesses based their strategies on inflation.
Today's high interest rates, essentially a Pavlovian reaction to years of continued inflation, will come down or the economy will. But if prices across the board continue to slow their inexorable increase, more and more Americans who have learned to cope with, or even love, inflation will find that the path to price stability may be more painful than the inflation they thought they hated.