Price Pressures In The Pipeline?

Judging by the U.S. bond market, inflation seems to be yesterday's nightmare. As demonstrated by March's subdued readings for the consumer and producer price indexes, prices have remained remarkably restrained after four full years of expansion. Continued price moderation, in fact, has led some economists to predict that the Federal Reserve's next move will be to ease monetary policy.

Charles Lieberman of Chemical Securities Inc. is unconvinced, however. He points out that the PPI for finished goods has risen at a 2.6% annual rate so far in 1995, vs. 1.8% in the year ended in December (chart). The figures for the core PPI (which excludes food and energy prices) are 2.6% and 1.6%, respectively. And producer prices of crude and intermediate goods over the past 12 months are up 16.4% and 7.1%.

Latent inflationary pressures are also apparent in consumer prices and in tabs for imported goods. So far this year, the consumer price index and the "core" CPI have risen at 3.5% and 4.1% annual rates, compared with 2.6% and 2.7% in 1994. And nonoil import prices, at last count, were up 4.4% in the past 12 months, compared with 1.8% prior to that.

Labor costs are also stirring. While wages have moved moderately higher over the past year, Lieberman notes that unit labor costs have jumped from a 0.5% rise in the year ended in March, 1994, to 2% over the past year. He expects them to continue to climb as productivity gains slacken in line with the aging expansion.

If the economy slows sharply, such pressures may remain subdued. But Lieberman thinks consumption could bounce back in the months ahead. If that happens, he warns, "inflationary pressures and wage rates could suddenly start to accelerate, prompting the Fed to tighten money one more time."