The news about inflation is good-for now-goes the official view from Washington. And that has kept markets on edge about the possibility of higher interest rates.
Federal Reserve Board Chairman Alan Greenspan regularly reminds Congress and others that passing economic phenomena are an important reason for the mild inflation of the past several years.
So do Fed regional leaders, notably Robert T. Parry, president of the Federal Reserve Bank of San Francisco, a voting member of the Federal Open Market Committee who is considered an inflation hawk.
Fed Governor Lawrence E. Meyer, a midwestern economist before joining the central bank, recently cautioned that the "transitory factors" restraining inflation "will diminish in importance over time."
And the Congressional Budget Office recently reported that "missing inflation" that would have otherwise arisen in the past two years because of tight labor markets was hidden by "several temporary masking factors."
The "favorable cross currents" seen as temporary include the strong international value of the dollar, the huge decline in computer-related costs, benign energy prices and slowing medical care inflation, noted economists Mickey D. Levy and Peter E. Kretzmer at NationsBanc Montgomery Securities Inc.
But they disagree that these low-inflation elements are temporary-or that prices would have soared in their absence because a low unemployment rate combined with economic growth over a sustainable level surely raises labor costs for employers.
In fact, they say, lower inflation is a real event prompted by the Fed's own disinflationary monetary policy of the past 15 years under Mr. Greenspan and his predecessor, Paul Volcker, as well as by global events.
Also skeptical of underlying inflation is Edward Yardeni, chief economist at Deutsche Morgan Grenfell Inc., New York.
"In Mr. Greenspan's model, job insecurity has been keeping a lid on wages. He is convinced that eventually tight labor markets are going to push wages up at a faster rate. He has been saying so since 1994, when he worried about a shortage of truck drivers and construction workers," Mr. Yardeni said.
But so far, he said, productivity growth has been sufficient to offset wage gains and to boost profit margins. At the same time, he said, consumer expectations of stable prices have helped undermine the psychology of inflation.
In other words, "Inflation is low because inflation is low," suggested Mr. Yardeni.
Others are not convinced, however. Gary L. Ciminero of Independent Economic Advisory, Providence, R.I., said several recent pieces of economic data, notably the rising wholesale price index, should have been "a wake-up call for inflation somnambulists."
The awaited economic slowdown will not arrive until the middle of next year, he predicted, and then only to the accompaniment of rising inflation and tightening moves by the Fed.
"Higher interest rates lie ahead," Mr. Ciminero said. In fact, most pronouncements from the central bank ought to be viewed as preparing the financial markets for a rate tightening move at either the Nov. 12 or Dec. 16 meeting of the Open Market Committee, he said.