Last summer, the consumer price index was indicating an inflation rate much higher than the reality. Now, it is indicating a rate much lower than the reality. While it is welcome to have very low readings like the CPI just published for April, it's important to remember that some of it is statistical illusion. The inflation rate is certainly falling. But it's not yet down to 3 percent a year, as the past several months' CPI would suggest. It's still around 6 to 7 percent.
That's a good deal better than last year, when it was 8 to 9 percent. But the improvement has been accomplished through the very unpleasant medicine of high interest rates that result in high unemployment. The inflation rate is down by two percentage points over the year, and the unemployment rate is up by two percentage points. It's the most orthodox kind of economics.
The Reagan administration had originally hoped to escape the dilemma posed by orthodox economics--the choice between high inflation or high unemployment. It hoped that monetary restraint, if sufficiently firm and persistent, would persuade people to moderate their wage and price increases before the bankruptcies and layoffs began. But it didn't work. As usual, it has taken the actual experience of a severe business contraction to enforce the rule of caution. There's much embittered debate among the authors of the Reagan supply-side strategy as to what went wrong. Perhaps the real blame resides with human nature. People behaved pretty much as they have always behaved in the past, rather than in the more enlightened and selfless ways the theory hoped to evoke. It's another melancholy victory for orthodoxy.
Present policy, if continued, can doubtless bring still lower inflation a year from now. But how much unemployment is the country prepared to tolerate on the way to stable prices? The past year is evidence that economic policy still has found no way to circumvent that sadly familiar question.