Two winters ago the inflation rate as measured by the consumer price index was 18.5 percent, the highest in modern memory. This winter it has been 3.7 percent.
Last month the government's three main producer price indexes--for crude and intermediate materials and finished products--all fell. It was the first time that had happened in seven years.
The powerful unions in the auto, trucking and some other basic industries have traditionally led the U.S. wage parade, which largely sets the "underlying" inflation rate. In recent months the auto and trucking unions have shifted into reverse, negotiating what amount to "givebacks" of some past wage gains to help preserve their members' jobs.
The decline in inflation is the one undisputed bright spot in the economy so far in the Reagan administration. The president cited it last Wednesday night in his news conference, in defending himself against the charge that his economic program militates against the poor.
A family of four with an income at the poverty cutoff of $8,500 a year has $375 more in purchasing power at current inflation rates than it would have had at the rates of two years ago, he said. In his radio speech Saturday he said "our greatest success has been in conquering inflation."
The rate has come down in part because of the oil glut and bountiful world harvests; energy and food prices have both been stable in recent months. It has also come down because the United States is now going through its second recession in two years, with unemployment at the highest level since the Depression.
Economists, as ever, are divided as to the extent of progress that has been made. None believes the rate will stay as low as it has been the last few months. Some believe it will bounce back toward double digits as the economy recovers; wages have not shown the same weakness outside such industries as autos and trucking as they have within.
Most take a middle view. They think the true rate has indeed come down a few points in recent months; whether it will continue down, they don't know.
For the economy as a whole--all prices, not just consumer prices--inflation peaked at a rate of about 10.5 percent late in 1980, just as Jimmy Carter was losing the election to Ronald Reagan. The broadest measure of price change, the implicit price deflator used in the calculation of the gross national product, rose at a 10.7 percent rate in the final quarter of 1980, though only 9 percent for the year as a whole.
Inflation as measured by the consumer price index also peaked about then. Three highly volatile parts of the CPI--food, energy and mortgage interest costs--often distort its underlying movements. For the other 65 percent of the CPI the high point came in October, 1980, when prices were 10.3 percent above the year before.
Currently, by contrast, both with and without food, fuel and mortgage interest rates, the CPI is up about 7 3/4 percent over a year ago. That is probably a better measure than the rates for the last few months, which mainly reflect the fact that the volatile elements in the index all have behaved well at once for a change. Energy prices have fallen, mortgage interest rates have been virtually stable, and food prices have been rising at only a 5.7 percent rate.
"I did not issue a press release on that 3 percent figure," said Murray Weidenbaum, chairman of the the president's Council of Economic Advisers, of the most recent CPI report. "It was not significant."
"What I take as significant, is that when you plot the year-over-year figures for the CPI, that shows a decided negative slope and tells me that the trend is down . . . and it also tells me the trend started before the recession," Weidenbaum said.
The president's chief economist believes the underlying trend in inflation right now is "maybe 7 percent," a level that is well down but still too high for the administration to shift its economic policy emphasis entirely toward promoting economic growth. Weidenbaum nevertheless maintains, in line with administration forecasts, that inflation can continue to fall even after the predicted strong recovery has continued for several quarters if monetary policy continues on a moderate course.
The CEA chairman's optimism on prices is echoed by a number of private economists, and challenged either as premature or plain wrong by some others.
At Data Resources Inc., an economic forecasting firm, the latest prediction puts consumer price inflation at about 6 3/4 percent for the next three years along with a healthy economic recovery but no boom. "We have broken the back of the 1965-1980 wage price spiral," declared DRI economist Allen Sinai. "This recession isn't like the 1974-75 recession in that respect. This time, there are wage givebacks."
Alan Greenspan, a former CEA chairman who is an occasional adviser to Reagan, said the nation is seeing "truly a significant trend toward less inflation. It is not an aberration."
Greenspan said interest rates remain high partly because financial markets believe the inflation improvement is "ephemeral" and that gains "will fade in the next year or so." Part of the progress will be reversed, he agreed, but added that "there are far more fundamental pressures" at work than just the recession's immediate impact.
When an economic recovery does get under way, some very sensitive commodity prices, such as for scrap steel, will immediately turn upward. Businessmen generally will begin to try to firm up their prices. At the least, the likelihood of more price declines will be greatly reduced.
However, those forces alone are not nearly strong enough to push inflation back onto a much higher track immediately. Companies usually emerge from a recession leaner and far more cost-conscious than they were before it began, and in the early stages of a recovery, productivity gains are particularly large as idle capacity is put back into use.
The question is whether, with a recovery, the rate of rise in wages will continue to decline. Some economists believe the improvement on the wage scene is far less widespread than the auto and trucking headlines suggest. Others believe a downward shift in the rate of wage increases can occur but has not yet.
A true skeptic is Joel Popkin, an economist who once headed the prices section of the Bureau of Labor Statistics and now has a Washington consulting firm. Popkin's latest forecast shows the GNP deflator rising 7.7 percent during the course of this year and 7.8 percent in 1983. He sees the CPI climbing 8 percent this year and 8.3 percent next.
Popkin sees no evidence that recent wage figures reflect anything other than recession-related reductions in bonuses and overtime.
"My reading is that we have not cut into the core of inflation. I do not think we have set the stage for a recovery in which inflation will continue to decline."
If the recession lasts into the fall, then a slice will be taken out of wages, he predicted. In that case, the recession would have affected the entire union bargaining calendar for 1982 and would have a much greater impact on increases going to nonunion and white-collar workers, which have to be hit, too, before a significant inflation improvement would be assured, he argued.
At the Brookings Institution, economist George Perry's forecast for the CPI this year is the same 6 3/4 percent as DRI's, but he is much less sanguine about 1983 and beyond. "Nothing has happened to tell you that you would not lose the inflation improvement back."
However, Perry did not rule out such a more permanent gain. After all, he noted, "the bad news on the economy is really only a quarter old. And except for the unraveling of oil prices, nothing much has happened that was not expected."
The Brookings economist thinks the policy makers at the Federal Reserve and in the administration believe the economy may be at a "tipping point" insofar as the rate of wage increases is concerned. For that reason, he said, policy likely will stay tight for some time. The whole process of ratcheting down wage changes will take time to spread throughout the economy, Perry went on. "It takes a fairly optimistic view of the world to think that will happen with a strong recovery. It's more likely if a recovery is not just around the corner."