The financial markets soared Friday on news that the nation's job market contracted last month, viewing this as confirmation that the genie of inflation remains firmly corked in its bottle.

A month earlier, the employment data and market reaction were precisely the opposite, as payrolls jumped and the unemployment rate fell.

But are bankers and investors right to set so much store by these numbers? Economists are sharply divided on the question.

Some see profound danger lurking since unemployment, at a 5.2% rate, is well below the "natural rate" - widely put at about 6% - that's believed to set off inflation. Thus, in this view, the Federal Reserve ought to raise interest rates without delay to bring the unemployment rate back into the neutral inflation zone.

"There is little to be gained by waiting, and possibly much to be lost," recently warned Charles Lieberman, chief economist at Chase Securities Inc., New York.

"While the linkage between higher wages and inflationary pressure is not clear cut, monetary policy should not be conducted through the rear-view mirror," said Sung Won Sohn, chief economist at Norwest Corp., Minneapolis.

But a number of other observers of business conditions think sweeping forces of economic change are likely to keep inflation pressure at bay indefinitely.

"The link between wages and prices is probably weaker now than in the 1980s," said Bruce Steinberg, manager of macroeconomics research at Merrill Lynch & Co. Rising labor costs in tight job markets are more likely to squeeze profits than stoke inflation, since fierce global competition prevents prices from being raised.

"The trade-off between unemployment and inflation is being overwhelmed by a shift to both lower unemployment and inflation," according to economists Paul A. McCulley and Alan D. Levenson of UBS Securities.

That trade-off is known to economists as the Phillips curve. As for the "natural" rate of unemployment that is believed to trigger inflation, no one is sure exactly where it lies.

"To anyone who asks what the 'natural rate' is, the reply is, 'There is no way of knowing; look at what is happening to inflation,'" noted Roger Bootle, chief economist at HSBC Securities.

"This is more than vaguely reminiscent of the debates between medieval schoolmen about how many angels could dance on the head of a pin," he wrote in a book published last month, titled "The Death of Inflation: Surviving and Thriving in the Zero Era" (Nicholas Brealey Publishing).

"The competitive forces now dominating the world of business and work are serving to eradicate wage push" as an engine of inflation, he emphasized. In fact, inflation has been running at nearly zero in North America and Western Europe and below zero in Japan.

The demise of inflation, he said, "opens up vistas, unseen for two generations, of both great promise and peril."

Debt should be avoided, and bond investors may be in for a "bumpy ride," he said. Stocks should do well in real terms, but investments should be chosen carefully, with heavily indebted companies avoided.

As for banks, "there is the potential for significant difficulties," he said in a recent interview. Bank stock investors should look for institutions with strong management and strategic vision.

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