For two years, inflation worrywarts have been warning Americans that higher consumer prices were right around the corner. The reasons: Tight employment was supposed to drive up wages, while rising prices for raw materials such as copper, aluminum, and paper were sure to travel right through the inflation pipeline and push up the cost of consumer goods.

But guess what? The pipeline seems to have sprung a leak. Price numbers released by the Bureau of Labor Statistics on Apr. 11 and 12 simply show no acceleration of inflation. Consumer inflation, measured over the previous six months, is slowing (chart). Prices for finished producer goods--such as gasoline, apparel, machinery, and cars--were virtually flat in March, far below the expectations of the inflation pessimists. And real wages are falling as well. During the past year, real hourly wages for production workers have dropped by .3%. In manufacturing--the hottest sector of the economy--real wages have actually declined by .6%.

TOPPING OUT. It's starting to look as though inflation has peaked for this business cycle. The price index reported by the National Association of Purchasing Management has declined for three consecutive months now, after hitting a 15-year high in December. The unemployment rate rose slightly in March, as the economy showed signs of decelerating. Inflation in the cost of medical care, long intractable, is still at its lowest level in more than 20 years. Even the prices of industrial raw materials such as lumber and most metals are beginning to top out.

The only areas of the economy where prices are still accelerating are autos and housing--and even those traditional signposts of inflation are misleading. Prices for new cars have remained virtually flat during the past six months, despite a dollar that is plummeting against the Japanese yen, putting upward pressure on the cost of imports. Instead, the cost of private transportation is being driven higher by increasing prices for used cars and a surge in auto finance charges. Automobile manufacturers still have almost no power to raise their prices, and they will have even less ability to do so as the Federal Reserve Board's interest-rate hikes of the past year begin to bite. Housing markets, too, are weakening as mortgage rates slowly rise. That should restrain increases in home prices and rents in the months to come.

Where did the inflation pessimists go wrong? As economists often do, they allowed themselves to be seduced by physical analogies. The image of an "inflation pipeline," driven by the ubiquitous "inflation pressures" from higher raw material prices, is simple and appealingly clear. Unfortunately, it also is very misleading.

The reality: Inflation is not a pipeline. In an information economy, commodity prices are far less important than inflationary expectations, productivity gains, and growth in the money supply. In the past, companies have been able to pass price increases in raw materials through to their customers. No more. During the current business cycle, almost anyone trying to increase prices is meeting enormous resistance. But the lack of pricing power hasn't damaged companies' bottom lines. Instead, corporations have been able to generate record levels of profits by cutting jobs, boosting productivity and taking advantage of slow wage growth.

The Federal Reserve and Chairman Alan Greenspan should take a bow as well. Adjusted for inflation, the money supply, as measured by M2, fell by almost 2% over the past year. Indeed, it has been declining more or less consistently since 1988, representing the longest single stretch of falling real money in recent history. With money growth so low, it's nearly impossible for inflation to get a foothold.

If inflation has peaked, how low can it go from here? Think back a bit. In the early 1960s, before the Vietnam War caused the U.S. economy to everheat, inflation averaged less than a measly 1.5% annually. There's no reason why the U.S. can't reach that level again.

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