WASHINGTON - The United States and other industrial nations are close to achieving a stable price environment in which businesses and households can make economic decisions without fear of inflation, Federal Reserve Board Chairman Alan Greenspan said yesterday.
"The true underlying rate of inflation in today's world may not be far from what I would call price stability," Greenspan said in a speech, to bankers in Tokyo during a four-day visit to meet with Japanese finance officials. Fed officials released the text of the speech.
Greenspan's comments on inflation were the most optimistic he has made to date and seemed to signal an increasing conviction among Fed policymakers that they have come close to accomplishing their goal of quelling inflation.
"I think it's a declaration of triumph over inflation," said William B. Hummer, president of Wayne Hummer & Co., in Chicago. "This has evolved gradually over a period of time, and now they're saying, We're here.
Last month in Dallas, Federal Reserve Board Governor Lawrence Lindsey expressed optimism on inflation when he said, "from a monetary policy point of view, the transition to stable prices is largely complete."
Rep. Stephen Neal, D-N.C., the chairman of the House Banking domestic monetary policy subcommittee, has frequently urged Greenspan and his colleagues at the Fed to pursue price stability. The term, sometimes used interchangeably with "zero inflation," is taken to mean a very low level of price changes that allows investors to act without fear of rising prices.
"Price stability is a condition in which households and businesses do not base their decisions on expectations of continued price inflation," said Greenspan. That does not mean prices are completely stable and do not change, he explained, but it does mean measures such as the consumer price index show inflation is "low."
Greenspan agreed with economists who have argued that current measures of inflation may be technically flawed and overstating inflation.
For example, the consumer price index published by the Labor Department uses a fixed basket of goods and services. Critics say the index falls to fully capture improvements in quality, which can justify price increases, or shifts in consumer buying practices to substitute products at lower prices.
One example often cited is computers, which have gotten much better in terms of speed, memory, and other features in recent years while their prices have fallen dramatically. Far-reaching technological improvements in medical care, on the other hand, are providing people with costlier treatments that also bring new benefits.
However, not all analysts were impressed with Greenspan's comments, arguing that the market is now preoccupied with fears that Democratic challenger Bill Clinton will win the presidency and put in place a big fiscal stimulus package.
"This is almost old news," said
David Jones, chief economist for Aubrey G. Lanston & Co. This is based on recession, which has brought down commodity prices, which has brought down basic inflation. The question is where do we go from here if Bill Clinton starts acting like Franklin Roosevelt and spends like a drunken sailor in the first I 00 days. " Federal fiscal policy is the issue challenging the Fed in the months ahead, Jones added. Mike Moran, chief economist at Dalwa Securities America Inc., said Greenspan's comments were about world prices, "rather than prices in just the United States, so I think he falls short of declaring price stability in the U.S."
Analysts agreed that they believe Fed policymakers remain inclined to lower short-term rates again if there is more evidence that the economy is not moving ahead.
Meeting yesterday with reporters, Greenspan repeated his view that the current slowdown in the United States and other industrial countries reflects the move by highly indebted borrowers to restrain spending. The adjustment process is taking longer than expected, and it is not clear when the the U.S. economy will begin to pick up, he said.
Also yesterday, two separate government reports were released showing that the economy was continuing to grind along in low gear with inflation well under control.
The Commerce Department reported that retail sales increased a modest 0.3% in September on gains for all major categories of durable goods. Moran said the figures were in line with estimates of sluggish economic growth in the range of 1% to 1.5% during the third quarter.
The Labor Department issued another benign report, this one showing an increase of 0.3% in the producer price index for September. Prices of finished goods excluding food and energy in the three months from June to September were up at annual rate of only 1.2%, the slowest pace of any quarter in more than five years.