WHEN THIS YEAR began, the Carter administration -- and most other people -- thought inflation was going to slow down. Consumer prices then were going up almost 10 percent a year. "As the year progresses," the president's Council of Economic Advisers said in January, "the rise in consumer prices should fall somewhat below a 7 percent annual rate." Instead, it promptly rose to more than 13 percent and has been stuck there ever since. The figures for September, published Friday, show no indication at all of that expected decline. What had gone wrong?
In the past, prices have generally followed wages. The forecasters assumed that the rise in wages would slow down during this year, and they were right about that. But, this time, prices didn't respond. In the past, they have usually responded by buying less. But this time consumers' psychology seems to be quite different. A great many Americans are evidently determined to maintain their accustomed standards of living and spending. To do it, they are cutting their savings and running up their debts.
The explanation isn't yet entirely clear. Do they assume that the government can protect them from another severe recession, like the last one, and keep everyone from suffering any great harm? It that's the case, the sense of security in American society has reached a point at which it is increasing the risk of uncontrollable trouble.
The inflation itself is now contributing to inflation. To try to protect their savings, people have been pouring money into real estate and bidding prices steadily higher. The Consumer Price Index includes the cost of buying a house, and reflects the impact of this speculative bidding. To try to cool down the speculation, the Federal Reserve Board has tightened credit. Because the Consumer Price Index also counts the cost of mortgage interest, the remedy for inflation is also, at first, inflationary.
The Carter administration and the Ford administration before it have struggled against the widespread habit of mind called "inflationary expectations." That's the easy assumption that you can always afford to pay a little more today, because you'll be making more tomorrow. The long campaign against inflationary expectations has exerted a pressure on the White House to keep arguing that the inflation rate is about to decline. When it's wrong, the result is public cynicism. When it takes the other course and acknowledges that inflation is not likely to improve soon -- as it is now doing -- it conveys a sense of impotence. Unfortunately, the latest figures bear the same message as their predecessors. The inflation rate is not likely to slow down until Americans are persuaded, one way or another, to get along with less of those commodities -- beginning with oil and beef -- that have led this year's inflation upward.