PRESIDENT Reagan has been reassuring voters that progress against inflation will soon translate into economic gains. The public, however, seems less than persuaded. Partly that's because unemployment has now overshadowed inflation as a major concern for millions of families. But it's also because the news about inflation is somewhat confusing.
On the one hand, the price indexes suggest that major progress has been made. The producer price index released Friday, for example, showed prices at the wholesale level actually dropped in September. The factors behind that drop aren't cheerful-- a continued slump in industrial demand, deep discounts in the depressed auto market and large losses in farm income. And wholesale prices are notoriously changeable. Still, it's good news for the inflation-fighters.
On the other hand, wages and other labor costs, a good measure of the so-called underlying rate of inflation, have been much slower to decline. That squeezes profit margins and builds up pressure for catch-up price increases once recovery begins in earnest. Workers are also becoming more resistant to accepting lower compensation packages. Chrysler workers' rejection last week of the contract negotiated by their union is only the most publicized of recent cases in which workers, even in severely depressed industries, have dug in against management demands for labor-cost relief.
Labor costs aren't the major factor in starting an inflation spiral, but they tend to keep it going. Industry-wide wage settlements and multi-year contracts negotiated in boom years maintain high wage increases even when companies are in dire straits. Cost-of-living adjustments based on last year's inflation have the same self-perpetuating effect. Fringe benefits, the fastest-growing labor cost, are even harder to control. The adversarial style of U.S management-labor relations, moreover, means that employers usually don't approach workers about needed concessions until it's really too late to save their jobs. When concessions are made and the plant closes anyway, labor feels betrayed.
This stickiness in labor costs is the major reason why tight money did not produce the painless reduction in inflation that monetarists promised. When there is less money around to spend, production rather than prices tends to get cut. The resulting unemployment does put downward pressure on both wages and prices--this is happening right now--but unemployment may have to stay high for a long time unless the country can figure out a better way to curb inflation's momentum.