The Alarm That's Ringing In Greenspan's Ear

Some dream of a cure for cancer, others of winning a state lottery. For a Federal Reserve Board chairman, the ultimate goal is finding an accurate signal of inflation. And in his search for the Holy Grail, Fed chief Alan Greenspan, as he noted in his testimony before Congress in February, is looking closely at the leading index of inflation compiled by Columbia University's Center for International Business Cycle Research. And that index is starting to emit danger signals.

Developed seven years ago by CIBCR's Geoffrey H. Moore, a leading expert on the business cycle, the index is a composite of seven indicators: commodity prices, the employment rate, the National Association of Purchasing Management's price index, the speed of supplier deliveries, Dun & Bradstreet Corp.'s percentage of companies expecting higher prices, public and private debt outstanding, and prices of imported goods, excluding energy.

The index is designed to predict turning points only, so it doesn't give information on how much inflation is likely to pick up. Importantly, though, Moore says the index has a "stellar" record of predicting turning points in inflation a half year or so in advance.

That's why the January and February surge in the index has drawn Greenspan's attention (chart). The growth rate of the index, which is more important than the level, has exceeded the 7% pace that Columbia's Anirvan Banerji, who works with Moore, says is the trigger for a cyclical upturn in inflation. Banerji says that the magnitude and breadth of the rise are compelling verification of the signal, but he is cautious about the duration of the increase. "We would like to see another month or two of data to be sure," he says.

Maury N. Harris at PaineWebber Group Inc. notes, however, that the recent rise in commodity prices partly reflects inventory building of materials in manufacturing and construction. That stockpiling cannot go on forever, though, and the rise in commodity prices, which shows up in two of the index' seven components, will slow. If so, the Moore index--and Greenspan's inflation fears --may head south.