INFLATION remains relatively low, according to the consumer price index for January. And the dollar has once again been rising rapidly on the foreign exchange markets. There's a connection between the two. The pattern has been clear for some time, and it's going to affect the way the American economy works for the rest of this decade.
The rising dollar makes imports cheaper for Americans. Its influence isn't limited to imported goods alone. It also forces those American businesses that compete with imported goods to hold their own prices down. But businesses that don't have to worry about foreign competition are under much less pressure to restrain their prices, and those are the businesses in which inflation is now concentrated.
If you take the consumer goods most affected by import prices -- fuel, clothing, furniture and new cars are prominent among them -- you will find that price increases there averaged barely 1 percent over the past year. In comparison, prices for all consumer goods and services rose 3.6 percent over that year. As for the items showing price increases much higher than the average, all of them were among those that imports do not affect. The cost of shelter rose more than 5 percent over the past year. Medical care was up 5.8 percent. Personal and educational expenses -- that includes college tuition -- were up 9.1 percent.
To put it another way, the things on which American consumers spend their money fall into two roughly equal categories. There are commodities, meaning tangible goods including food. And there are services which, as the government statisticians define the term, include the home that you rent or own. Over the past year, the price increases for all commodities averaged just over 2 percent. For services, the figure was 5.1 percent. A lot of commodities have to compete with imports. Very few sevices do.
In terms of inflation, this country now has a split- level economy. Half of it, feeling the chilly wind of foreign trade, has held its prices remarkably stable. The other half, out of the wind, has quite a high inflation rate.
This pattern is, unfortunately, entirely reversible. At some point the dollar will stop rising against other currencies. Then there will no longer be falling prices of imports to offset the rapid and steady increases elsewhere, and you will see the consumer price index begin to move upward faster. If the dollar should fall against other currencies, the prices of imports would go up and the CPI would rise faster than ever. That's why the rise of the dollar -- now entirely unpredictable in its movements -- will probably determine the timing of the next American recession.