INFLATION has fallen to about 5 percent, and, with the economy still very weak, most forecasters see it staying around that level for the next year or so. A 5 percent annual increase in prices used to be thought unacceptably high. After double-digit inflation, however, it looks pretty tolerable--if you can assume that inflation won't accelerate when economic recovery starts in earnest.

A good deal of inflation's future depends on what happens to wages and fringe benefit costs. Labor costs have not been the driving force behind recent inflation but--because they seek to compensate workers for price increases in the previous year-- they maintain inflation's momentum. Because most workers have come to expect wage increases no matter what, companies have also found it hard to adjust to reduced circumstances except by laying off workers. That's why signs of moderation in wages are so important in predicting the future path not only of inflation, but of unemployment as well.

Recent wage settlements provide mixed signals. A new study by the Urban Institute finds that major union concessions have substantially decreased expected growth in union wages. Across the economy, moreover, labor cost moderation has been slightly greater than would have been predicted solely on the basis of higher unemployment and lower inflation in oil, housing and other prices. That suggests that hard times may have forced fundamental changes in wage-setting practices.

Although major concessions aren't expected in labor negotiations next year, economists think that moderation will continue. Partly that's because auto and steel contracts--the high fliers of recent decades--are no longer the pattern-setters they used to be. With unemployment still very high, workers will also be anxious to avoid strikes. And even if the economy picks up only modestly, increases in productivity should moderate the effect of labor cost increases on prices.

The signs of permanent progress, however, aren't very strong. Concessions have come only in troubled industries, and, even in these, workers have begun to balk--witness the breakdown of steel and Chrysler renegotiations this last year. Although interest in such plans is growing, workers are still wary of agreements that tie their wages to company profitability. Only minor changes have been made in those contract features that are the main culprits in perpetuating inflation--multi-year agreements and built-in cost-of-living adjustments. If the economy heats up again, these contracts will add to the inflationary fuel.

For inflation moderation to outlive the current recession, both labor and management will have to change some old habits. If labor leaders want to save jobs, they will have to admit that their old tactics of setting demands without regard to competitive pressures are now outmoded. If managers want workers to feel that their fates are tied to the company's long-run health, they will have to offer better job security and greater worker participation in both company decisions and profits. These changes should also boost productivity--and in the long-run that means not only better profits, but higher real incomes for workers as well.