Keep an eye on inflation.

• Author: Rattner, Steven

SUDDENLY, fears of inflation and a runaway economy have dropped almost from sight. Now come questions about whether the Fed has been overzealous in its anti-inflationary stance. Some experts have begun arguing that, as a result of factors such as the globalization of the world economy and the re-engineering of American corporations, traditional inflationary benchmarks now longer are appropriate.

Would that all the optimists were right. Yet, nagging doubts persist. Inflation has been underestimated in the past, with near disastrous results. Indeed, recall that policymakers historically have erred on the reflation side far more often than the opposite. As recently as 1993, the Clinton Administration arrived trumpeting the need for a stimulus. Fortunately for the nation, by the time Congress got around to acting, an economic recovery that had been under way for more than a year became visible to all but the most skeptical.

Clinton was hardly alone. The last Democratic president, Jimmy Carter, took office in January, 1977, with the same refrain. He began a push for a $50 rebate for all Americans. That lasted less than three months from his inauguration, or until Carter discovered inflation. The central problem of the Carter Administration, wrote Hobart Rowen in his book, Self Inflicted Wounds, was "failing to recognize and to deal with the massive inflation that finally caught up with the country."

No one is suggesting today that inflation is likely to rage out of control (least of all Rowen, who has criticized the tightness of Fed policy). Neither should our discipline be relaxed, though, because of utterly unproven hypotheses about structural changes in the U.S. economy.

It is to be hoped, for example, American business truly has learned to operate more efficiently. Increased productivity holds the promise of higher incomes and less pressure on prices, but it also is true that business' reluctance to hire has pushed the average workweek and overtime to historic highs. Almost inevitably, that must lead to more hiring and, equally inevitably, a tighter labor market and upward pressure on wages.

As for the counter-inflationary pressures of foreign competition, don't expect too much help. At about 10% of Gross Domestic Product (GDP), imports have even less influence on the economy. For obvious reasons, imports have little effect on pricing of services. In any event, recent studies suggest that import prices have kept close track to domestic ones.

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