There's no doubt that lower inflation is good news for the economy. But yesterday's claim by the White House that "all Americans are experiencing the benefits of lower inflation rates" does not tell the whole story.
Surprising as it may seem, many Americans are being hurt by today's dramatic slowdown in inflation.
Inflation is generally blamed for making people worse off. But there were some winners from its rapid acceleration in the 1970s. Among them were borrowers who saw inflation trim the real value of their debts before they had to be repaid; the federal government, whose tax revenues were pushed up faster than its outlays, and homeowners who experienced huge windfall gains as house prices shot up.
Just as some people gained more than they lost from accelerating inflation, so some are losing from the current "disinflation" or slowdown in price rises.
For example, the good news for consumers contained in recent government reports of falling prices spells bad news for many companies. The price figures "suggest profits in the first half of this year are going to be down tremendously," analyst Joel Popkin commented, as business costs continue to rise but revenues do not.
Unwinding inflation "is going to cause a lot of problems," economist Rudolph Penner of the American Enterprise Institute agreed.
The most obvious losers are those who "bet" in one way or another on continued high inflation. Among them:
* Companies that took on long-term debts at double-digit interest rates that looked cheap when inflation was 12 or 13 percent, but are crippling when prices are rising at annual rates of less than 5 percent.
* Employers who negotiated wage contracts with a built-in inflation assumption of 10 percent or so. A few companies, like the automakers, have been able to renegotiate labor contracts. But others will be left with fast-rising wage costs that outstrip the price increases they can pass on to consumers.
* Speculators and others who bought gold, antiques, commodities and other assets as "inflation hedges" but have seen these prices fall rather than rise. Those who borrowed at high interest rates to finance the original purchases will be hit even harder, suffering high financing charges as well as capital losses.
* Homeowners who took on large and expensive mortgages expecting their incomes to rise with inflation--thus reducing the burden of the mortgage payments--and their houses to soar in value. House prices are steady or falling, it is difficult to sell houses at current mortgage rates, and lower inflation makes the mortgage burden higher.
* Companies that invested in energy, looking forward to rising oil prices. The winners of last year's frantic corporate shopping spree for oil companies are left with less of a bargain than they expected.
Slower inflation also means government revenues lower than expected. The federal government's income tax take rises more than proportionately with inflation as rising prices and wages push people into higher tax brackets; it loses on the way down. State and local governments will also reap less than they expected from income taxes and excise and real estate taxes.
Of course, there are winners, too. The small savers who got burned when inflation roared ahead are now benefiting from the extraordinarily high interest rates that are hurting borrowers. Everyone with a money market fund knows that it is now possible to stay ahead of inflation and to make a real return on savings.
Similarly, the employes whose contracts are squeezing profits are themselves experiencing unexpected increases in their real incomes, or purchasing power. Even those who are protected from inflation to some extent by cost of living adjustment clauses (COLAs) are better off without that inflation, as the COLAs do not usually compensate one-for-one with price increases.
Economist William Fellner calculated what it would mean for workers covered by the major wage settlements in 1980 if inflation suddenly disappeared. With 10 percent inflation, employes would have had average real wage increases of 1 percent a year under the COLA contracts and 0.4 percent under the non-COLA contracts; with no inflation their real wages under these contracts would rise by 5 percent and 10.4 percent a year.
The catch is that while workers who keep their jobs will benefit from lower inflation, or even falling prices, there are also many who are losing their jobs.
This is because the inflation improvement, welcome though it is, comes hand-in-hand with a deep recession and high unemployment. It is important to distinguish between two aspects of today's inflation, economist Charles Schultze said. In addition to the effects on the economy of the lower inflation itself, he said, are the effects of the slow growth and economic hard times that accompany any process of reducing inflation.
For example, extraordinarily high interest rates in relation to the rate of inflation are caused partly by today's tight money policy that is aimed at fighting inflation, economists believe. They are also partly due to the lower inflation itself, a senior Fed official said recently. It takes a while for markets to catch up with changes in the inflation outlook, so that interest rates often trail the inflation rate when it is rising and exceed it when it is falling.
Commodity prices are soft in part because of the recession and in part because demand from "inflation hedgers" has disappeared as inflation has slowed.
After the acceleration of inflation to peak levels in recent years, it will take a much longer period of painful slow growth to wring it out of the system, Schultze said. There is "nothing new in the fact that companies get squeezed if facing long-term wage contracts" when the economy is running below capacity and prices are soft. What is new is the likely duration of the squeeze, he said, and it is this which accounts for much of the pain suffered by the losers from lower inflation.