Inflation or deflation? The debate among economists is growing.

The conventional wisdom is that inflation remains a threat to the nation's economy because of tight labor markets, a viewpoint helped Friday by the Labor Department's report of a healthy job market in October.

The nation's unemployment rate dropped to 4.7% last month, the lowest level in 23 years. New payrolls jumped a robust 284,000, surprising many analysts.

More worrisome for inflation-watchers, private sector pay rose an average 6 cents, to $12.41 per hour. That means hourly earnings have risen 4.2% since last October, the biggest annualized increase since the 4.3% rise from July 1988 to July 1989.

But deflationists stress that inflation has actually decreased this year despite the low jobless rate. They attribute this to powerful price-decline factors globally, particularly in the wake of the currency debacles in Asia.

The debate is really about the proper stance on interest rates by the Federal Reserve in trying to extend the economy's expansion, currently six and a half years old.

Fed Chairman Alan Greenspan is the leading advocate of the position that inflation is not dead-implying that interest rates may yet have to be raised to enforce price discipline.

"Today's economy has been drawing down unused labor resources at an unsustainable pace," the central banker said Oct. 29, welcoming the cold- shower effect of the recent stock market slide. He was atypically blunt in asserting that "it is inflation, not deflation ... which serves as the major threat to this expansion."

Many economists strongly agree. "We are not a buyer of the deflationist argument and remain in the same church, in the same choir, singing from the same hymnal as Mr. Greenspan," said Paul A. McCulley, chief economist at UBS Securities, New York.

But a Fed rate hike at the central bank's session on monetary policy Wednesday is still viewed as unlikely by economists on both sides of the argument.

The turmoil in Asia "renders the high-frequency data essentially irrelevant for policymakers over the next few months," Mr. McCulley said.

"The strength of the October jobs report probably would have led the Fed to tighten at the Nov. 12 meeting. Under current circumstances, it is very unlikely to do so," said Bruce Steinberg, chief economist at Merrill Lynch & Co.

Mr. Steinberg believes the economy "is downshifting in the fourth quarter, primarily because there will be a payback for the excessive consumer spending of the prior period." He sees no pickup in inflation and believes some deflationary forces are at work.

So does Edward Yardeni, chief economist at Deutsche Morgan Grenfell. "Events in Asia have heightened my concern that deflationary pressures remain powerful, notwithstanding the very easy monetary policies of the major central banks in the United States, Japan, and Europe," he said.

"Reflationists have warned investors about a global synchronized boom since the start of the decade," he said. "They were right for about six months in 1994. Recent events in Asian currency markets and global stock markets raise the specter of a global synchronized recession instead."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.