Is Wall Street too fretful about inflation?

``Inflation,'' says Arnold Moskowitz, ``is the nemesis of the financial community.'' Few adverse economic situations, says Mr. Moskowitz, the senior vice-president and economist with Dean Witter Financial Services, strike as much terror in the investment community as that one word. No wonder the markets have been vigilantly scouring the economic bushes lately, looking for any signs of renewed inflation in the United States. The investment community is concerned about inflation because of the tight labor market, which has put upward pressure on wages, continued strong consumer spending, and increased factory use over the past year.

Indeed, interest rates have inched up somewhat lately, although wage accords continue to be moderate. For example, the Teamsters Union recently settled for a modest 2.6 percent annual average wage increase over a period of three years.

On the downside, however, Wall Street was less than happy to learn that the federal budget deficit rose to $29 billion in March, up from $24 billion in February. Bigger deficits increase government borrowing and add to the momentum of higher interest rates.

Yet, Moskowitz believes the market may be overly apprehensive about inflation. He sees only ``moderate inflation for the rest of this year.'' Key commodity prices, he notes, have been flat in recent months. Granted, he says, there has been a ``modest rise in food and fuel prices.'' But he expects them to be temporary, given the moderate economic growth under way in the economy.

Despite continuous efforts by the Organization of Petroleum Exporting Countries (OPEC) to control oil prices through production restrictions, ``oil prices should remain in the $16-to-$18-a barrel range,'' Moskowitz says. ``There's just too much oil in the pipelines and too much willingness for producers to cheat for prices to climb much higher.'' West Texas intermediate, the main benchmark for US crude, was trading in the $18 range last week.

Indeed, the best case for oil stocks, according to energy analysts, is that prices will hold steady at about $18 a barrel. Last week a number of oil companies, including Exxon, Mobil, Amoco, Occidental Petroleum, and Unocal, posted substantially higher earnings for the first quarter, reflecting refinancing arrangements as well as earnings from chemical operations.

``Inflation remains moderate, and I just don't see it getting out of hand,'' agrees Philip Erlanger, vice-president and chief technical analyst at Advest, a brokerage in Hartford, Conn. The ``greater threat to the economy is not inflation, but deflation.'' But deflation could occur only if the economy were to collapse into recession, and Mr. Erlanger sees no likelihood of that now.

Rather, he believes the Dow Jones industrial average might yet rise to between 2,800 and 3,000 by August, with a ``final move to 3,500'' by late next year. Erlanger says there is a possible downside range for the Dow of about 1,800 points, given all the uncertainties in the global economic situation, but he believes continued vigorous consumer spending will keep the economy on course.

The Dow, for its part, has a long march ahead of it if it is soon going to reach the higher range envisioned by Erlanger.

Last week the Dow closed up 17.24 points, at 2,032.33.

Much of the reason for his optimism, says Erlanger, stems from demographics. ``So long as consumer debt can be serviced,'' he says, moderate growth ``will persist.'' And because so many husbands and wives are working, particularly in younger families, he believes debt servicing should not be a major problem for the US in the months ahead. The upshot? Continued growth for the US.

One beneficiary of the present climate of moderate inflation and modest economic growth is the secondary market, which includes turnaround stocks. These are companies that have been generally shunned by investors because of prior financial problems.

George Putnam III, who publishes The Turnaround Letter, a newsletter in Philadelphia, notes that secondaries continue to outperform blue chip stocks, with the American Stock Exchange and the NASDAQ composite both up about 14 percent since the beginning of the year, compared with an increase of about 4 percent for the blue chip-oriented Dow and 7 percent for the Standard & Poor's 500.

``Turnarounds are up even more,'' Mr. Putnam says. The rate of increase has been about 22 percent since January, he notes. Turnaround stocks, however, had been badly battered last October and November, as investors sought safety.

If higher inflation were to return in the months ahead, it would not necessarily work against turnaround stocks, since ``in many cases they are financed by fixed-rate debts, rather than floating exchange rates,'' Putnam observes. Such stocks, of course, are generally considered risky, which is why they are usually avoided in the first place. ``There's never a guarantee that they will pull out of whatever difficulty they are in,'' Putnam says. But when they do show a gain - such as Chrysler did back in the 1970s and early '80s - ``the gains can be spectacular.'' Putnam recommends such issues as Charter Company, Genesco, U.S. Home, and Manville preferred.

For similar reasons, - moderate inflation and strong consumer spending - Erlanger, of Advest, finds retail, entertainment, oil, and basic manufacturing issues technically attractive. Among issues recommended by Advest are Clorox, IBM, Kerr-McGee, Mobil, Motorola, Toys ``R'' Us, CBS, Nordstrom, Warner Communications, and Walt Disney Productions. But Erlanger is a little concerned about Disney, despite a string of recent box office hits, including ``Good Morning, Vietnam,'' ``Three Men and a Baby,'' and a reissue of ``The Fox and the Hound.'' Success like that, he says, is a tough act to follow.