Has the inflationary tiger been decisively tamed, or does it lurk in the economic shadows, ready to confound the outlook this year for interest rates, bonds, and bank stocks?
Economists have differing views. Some feel the recent period of notable price and wage stability is ending. Others say global changes promise to check inflation for the foreseeable future.
Inflation in this country surely looks to be under control. Consumer prices rose a mild 2.7% in each of the past two years. And no less an inflation fighter than Federal Reserve Board Chairman Alan Greenspan recently suggested these numbers may be exaggerated by as much as 1.5 percentage point.
But Eugene J. Sherman, research director at M.A. Schapiro & Co., New York, said he sees storm clouds gathering from an "already overheated" economy.
"The first signs of accelerating prices could show up at any time," he said, "but we expect them to be visible in the spring."
Inflation will intensify through the second half of the year, he said, with the federal government's Consumer Price Index hitting a seasonally adjusted annual rate of more than 4% in the fourth quarter.
Mr. Sherman said he thinks the Fed itself will be surprised by this and respond by raising rates spasmodically "while it awaits confirmation that the latest inflation acceleration is built in, not an aberration."
He believes the central bank will be compelled to tighten credit another 200 basis points this year, with the federal funds rate reaching 7.5% in November. That would put pressure on bank earnings and bank stock prices.
But Mr. Sherman acknowledged that his view is "not widely shared" right now.
Robert G. Dederick of RGD Economics, Chicago, consultant to Northern Trust Co., said he sees inflation "waiting in the wings" but making its entrance more slowly, with consumer prices rising at about a 3.5% annual rate.
"The economy has fundamentally positioned itself for a worsening of inflation," he said last week, with both labor and manufacturing resource utilization rates now near their capacity levels.
Mr. Dederick expects the Fed to raise short-term rates another 150 basis points this year to brake the economy and counter the inflationary trend.
Some other economists are far less concerned about inflation.
"I don't accept the view that growth causes inflation," said Lacy H. Hunt of HSBC Securities Inc., New York. "In the fourth quarter, we had gross domestic product growth of 5%, with inflation running at the lowest level of the year," he estimated.
"To my way of thinking, inflation is still too much money chasing too few goods," said Mr. Hunt, offering the classic definition. "Right now, I see ample goods, and I see constriction on the supply of money."
Mr. Hunt said he expects inflation to stay around 2.7% again this year. And he expects the Fed to continue tightening credit, although he disputes the necessity for this.
Edward Yardeni of C.J. Lawrence Deutsche Bank Securities Corp. also said he thinks inflation fears are exaggerated, although he feels the Fed was correct to puncture speculative activity last year by raising rates.
"I believe bond yields were boosted by an unwarranted fear of reflation," he said.
"If inflation remains low, as suggested by the latest figures for wages, producer prices, and consumer prices, then inflationary expectations should drop, and so should bond yields," Mr. Yardeni said.
"My target for the (long-term) government bond yield is 7% by the end of this year," he said.