Fear Of Flying Pricesby
Randy Merk, a portfolio manager at Benham Capital Management Group in Palo Alto, Calif., says inflation isn't bugging him these days. That attitude is the main reason why big investors have been buying bonds, sending the rate on 30-year Treasuries from about 7.7% to about 7.4% in recent weeks. With inflation rising just 3.1% over the past year and still slowing, he sees that "investors are beginning tounderstand that inflation is not a big problem."
But that's not how LaMonica Hardwell sees it. The 25-year-old mother of two, who lives with her husband Dennis in Harbor City, Calif., says money is tight. Although both are employed--she runs a babysitting business out of her home, and he works as a county clerk--Hardwell worries about the soaring price of such family necessities as baby formula and disposable diapers. "The dollar just doesn't buy as much," she says. "Prices are definitely going up. I think it will get worse."
Is Hardwell the last living American worried about spiraling prices? Not by a long shot. Even after some 3 1/2 years of economic stagnation, America's consumers just aren't convinced that inflation is tamed. Indeed, they expect the cost of goods and services to grow about 4.4% over the next year, according to a July Conference Board survey--far faster than economists' projections (chart).
There it is: a yawning gulf between perceptions and actual inflationary pressures. No one is more acutely aware of that gap than Federal Reserve Chairman Alan Greenspan. The nation's official inflation worrywart told the Senate Banking Committee on Aug. 5 that inflationary expectations are keeping long-term interest rates higher "by a very significant order of magnitude."
UPBEAT NEWS. Strange thing is, the gulf persists despite mounting evidence. For some key items--food, energy, and housing among them--inflation is nearly gone. Moreover, the unemployment rate is widely expected to stay above 7% through 1993. As labor is slack and wages grow slowly, this suggests that the core rate of inflation (which leaves out food and energy prices) could drop as low as 2.8%, says Chris P. Vavares, an economist at forecaster Lawrence H. Meyer & Associates Ltd. The rate hasnot dipped so low for a sustained peri-od since 1965, when Lyndon Johnsonstarted to crank up the war in Vietnam.
The inflation news from Industrial America is unremittingly upbeat. In the past 12 months, manufacturers upped prices on finished goods by an average of just 1.5%. From cement to electronics to steel, companies are cutting prices and squeezing suppliers. "Quite a few of the large companies are saying we're not accepting any price increases," says Larry Combs, a marketing vice-president at Cleveland-based Parker Hannifin Corp.'s Filtration Group.
Even the drug industry--notorious for its rising prices--has got the bug. Seven big drugmakers have vowed to hold their price increases this year at or below the general rate of inflation. "No longer can we allow ourselves to have the mentality that costs are just rolled on through to the consumer," says Du Pont Merck Pharmaceutical Co. Executive Vice-President Kurt M. Landgraf.
So why do consumers persist in fearing inflation? In part, it may just be human nature to pay closer attention when prices go up instead of down. Also, consumers see some hard-to-avoid tabs continuing to rise: The big increase in costs of education, a rising property-tax bill, and higher sticker prices for automobiles. Their skepticism grows every time they sit down to pay their bills or make even the most modest purchase. Smokers have seen the price of cigarettes rise by 8% this year, and with cable charges rising, the cost of being a couch potato rose almost 6%. Over the past year alone, college tuition has risen an average of 11.6%.
J. Ernest and Joan Loomis of Madison, Conn., don't need economic studies to tell them that. With one child recently graduated from college and another just entering, the couple is feeling the pinch. "Our biggest uncontrollable expense is college tuition," says Ernest, a computer consultant and director of business development for Pacific Information Management Co. of Los Angeles. "College tuition is truly out of control."
Anyone who has to go to the doctor or into the hospital knows rising medical costs remain a fact of life. The costs of medical care rose 7.5% in the past year, says the Bureau of Labor Statistics. But even that understates the increase in out-of-pocket costs, since many employers' health plans are less generous.
TUESDAY BARGAINS. Then there's the taxman. From California to Connecticut, taxpayers have seen their state tax bill rise by almost $20 billion over the past couple of years. An economist will tell you that an increase in property or income tax doesn't count as a price rise. But try telling that to a taxpayer who has less disposable income. What's more, fiscally pressed states will likely be back for another bite next year if the recovery remains weak.
Some consumer worries about inflation are being fed by artificial price increases. Take the widely publicized nominal prices for automobiles. This year, U.S. and Japanese auto makers boosted sticker prices on new autos and light trucks. But having created the appearance of inflation, the carmakers then gave most of the increases back to consumers in the form of discounts and rebates. In the end, the price of new cars rose by just 2.3% over the past year.
Auto makers aren't the only companies to embrace the strategy. Just last month, Carnival Cruise Lines Inc. announced it was raising cruise prices by 9%, effective in November. But the price increase is on paper only, since Carnival plans to offer deep discounts to match competitors' slashed rates.
If consumers are truly going to be convinced that inflation is no worry, they'll need tangible proof of price cuts. Some companies have been obliging. The Carmike Cinemas Inc., a 1,500-screen chain based in Columbus, Ga., introduced a special Tuesday bargain in some markets, cutting all tickets to the regular children's price--usually about $3 a seat. And when Christopher's Restaurant, a popular 250-seat eating place and watering hole in Cambridge, Mass., found its business going downhill last year, owner Charles Christopher reformulated the menu and cut prices an average of 20%. That plan boosted not only traffic but revenues, too.
Any plans to raise prices? No way, says Christopher. "Greed hasn't set in yet. Once you start raising prices, people just say, 'Here they go again.' I'd rather keep prices down and keep the place filled." As that strategy spreads, inflationary fears eventually may loosen their grip on the economy.