The wage and price outlook for the United States has worsened so much that not even a mild recession is likely to make much of a dent in the nation's underlying rate of inflation, which now may be as high as 9 percent, according to a senior Carter administration official.
Moreover, the country may be on the verge of a new acceleration of industrial wage and price increases that could push that underlying rate even higher, warned the official, who is one of the administration's chief inflation fighters. Under the terms of the interview, the official could not be identified.
If that further acceleration occurs, he added, it could take unemployment rates near 10 percent to reverse it.
Publicly, administration economists are more sanguine about the inflation outlook. Treasury Secretary W. Michael Blumenthal has said he hopes that the rate will not be much more than 8.5 percent, and the official word still is that the rate is expected to slow significantly in 1980.
Some other key Carter advisers disagreed with the official's pessimistic assessment, saying it still is quite possible to have both a slowdown from the 13.9 percent rate of the last three months to the underlying rate of 8.5 percent and also a further drop next year.
Even in the extraordinarily bleak assessment the senior official offered in an interview, the sharp increases in the cost of food, fuel and housing that have pushed current inflation rates into double digits will be slowing later this year, he said.
But, in his view, the slowdown is coming too late to prevent larger wage demands from large industrial unions. "The acceleration [in inflation] from that is still to come," he cautioned.
The expected slowing of the rate of economic growth, which already may have begun, is expected to have title effect on inflation. Even with such a slowdown, he said, "I would think you would get some rate of price increase . . . very close to 9 percent for the remainder of the year."
You are talking about the basic underlying momentum of inflation. You're not talking about food and energy any more," he said. "And in that sort of situation, a mild recession is not going to break that momentum of inflation . . . The economy may slow down, but it isn't going to stop the inflation."
The official said he is afraid of an acceleration in inflation because he believes the following scenario could be played out this year and next:
The Teamsters settlement in April, following a nationwide strike, breached the administration's 22.5 percent pay standard for three-year contracts. Now the rubber workers are on strike against Uniroyal, also demanding more than the voluntary standard allows.
If the rubber workers do manage to break the standards," the official said, "then the electrical workers will follow, the automobile workers will follow, and that will establish the pattern for the large industrial unions." The electrical workers' contracts expire in early July, and the auto contracts on Sept. 14.
"By the time you get to autos, you really have got almost no influence left on wages from the standards," he continued. Then the auto industry pacts will "go pretty much to what the economic environment would dictate, which is something pretty damn close to what they got last time . . . one of these 35-plus-percent type contract settlements.
"If the pattern gets established, I know of no program that can drastically lower the large wage increases next year," he said.
"Unless you want to take unemployment up close to 10 percent or something like that, I see no way by which we can expect nonunion and smaller-union workers to accept wage increases again below the big unions," he added.
"You will be in the second year of the pattern of wage negotiations. The steelworkers will just follow and so will everyone else.
"Then you're sort of left waiting around for two years to elapse until a new round of wage bargaining rolls around, and you hope that you will have better luck on food and fuel prices that time," he said.
If this gloomy possibility of industrial wage acceleration comes to pass, then other top administration officials agree that the chances of reducing inflation below 8 1/2 percent or 9 percent in 1980 all but vanish.
Said one Carter adviser. "The grounds for a slowing of the inflation pace next year are still there."
But, he acknowledged, "If we get a significant breakthrough in wage acceleration, then the basis for expecting an easing of inflation next year becomes substantially weaker."
The key element in the inflation process these days, most Carter economists say they believe, is the fact that there has been very little growth in productively-the amount of goods and services that are produced using a given quantity of labor, land and capital.
Without any increase in productivity, businesses must pass along all of their cost increases or else see their profit margins fall. If workers insist on at least keeping abreast of inflation by getting wage gains of similar size or more, then the inflation spiral continues unabated.
"We are just not generating any productivity growth," the senior official said. "That tells me that, independent of the level of inflation in the industrial sector of the economy, workers and everybody else are not going to have any growth in real incomes."
The problem actually is more acute than that because, he continued, "I don't see anything possible over the next several years but that what I would describe as basically non-industrial prices-food, fuel and housing-will, on average, tend to exceed the overall rate of inflation.
"And how does a country make that up?" he asked. "How do you maintain real incomes for industrial workers? You have to have big growth in productivity. We don't have that."
Nor, in his opinion, is there very much the government can do in the next two or three years to help the economy generate any substantial productivity increases, or to bring food, fuel and housing inflation rates down to the average for all prices.
"Therefore, the future couple of years for the country is [a time] of further substantial erosions of real incomes, or at least no growth in real incomes of the types we've gotten used to," he said.
"The only argument is going to be at what level of inflation and at what level of unemployment is the country going to except that. We can repeat and play out completely the whole exercise of 1973-74. In other words, we can fight about it.
"Each individual can deny that in the aggregate it is simply impossible to have increases in real income and say, that may be true, but it ain't going to apply to me . . . then industrial wage and price inflation will just explode again.
"If that's true," he continued, "then everybody ought to realize that and moderate our demands. But we don't have any mechanism for doing that."
Traditionally, people were threatened by competitive pressures, say, from an economic decline that occurred accidentally or as a result of deliberate reductions in goverment spending or increases in interest rates.
"But what we find is that nobody responds to that anymore . . . We don't have any mechanism to get people to scale back their demands," he said.