Fighting Inflation Does Have a Cost

'IT's time to file a missing persons report on inflation - it's nowhere to be found.'' That imagery was used by Ron Schreibman, vice president, National Association of Wholesaler-Distributors in response to the news Tuesday that wholesale prices fell 0.1 percent in August. The producer price index didn't change in July and dropped a similar 0.1 percent in June.

This good news was followed Wednesday by another report from the Bureau of Labor Statistics in Washington that consumer prices had risen a tiny 0.1 percent in August.

To Dean Baker, such low inflation numbers are an excellent reason for the Federal Reserve to seek more employment. ''There is really no inflation in sight,'' says the Economic Policy Institute economist. Thus when Fed policymakers meet Sept. 26, they could afford to lower interest rates further.

But Stephen Cecchetti, an economist at Ohio State University in Columbus, says, ''Restraint continues to be called for. But I am not suggesting we crank down hard on monetary policy to bring inflation down from 2.8 percent to 1 percent.''

Consumer prices have risen at a 2.8 percent annual rate so far this year, up fractionally from 2.7 percent in 1994. Producer prices are going up at a 1.4 percent rate, compared with 1.7 percent in 1994. The Fed has said it would like to see a 2 percent rate for consumer prices. It maintains that greater price stability boosts the efficiency of the economy, since neither business nor consumers need then take inflation into account in their affairs.

But Mr. Baker maintains that once inflation gets down to modest levels - 2 percent to 4 percent, economists have been unable to find any benefit from reducing inflation further in terms of more productivity or output. If knocking inflation down from 2.5 percent to 2 percent requires boosting unemployment by 0.5 percent or some 600,000 jobs, it would be a highly costly decision, he says.

It would trim growth in the real output of goods and services in the economy by about 1 percent, or $72 billion. The federal budget deficit would rise by $15 billion or so. ''These are costs borne by everyone,'' Baker says.

Baker, whose institute gets about one-quarter of its funding from organized labor and another quarter from business, figures workers have not been getting a fair shake in the economy. Economists at the Prudential Insurance Company of America say that ''inflation has not yet disappeared as a financial consideration.'' To owners of long-term bonds, 1 percent lower inflation makes an improvement in their real return that could be substantial.

''There is still reason to try to knock it [inflation] down,'' says Susan Hickok, a Prudential economist in Newark, N.J.

If problems in measuring inflation were fully taken account of, the consumer price index might be as much as 1 percentage point less, calculates Mr. Cecchetti. In other words, the CPI would be rising this year about 1.8 percent, not 2.8 percent. Fed Chairman Alan Greenspan has talked of the need for considering such revisions in the procedures for measuring consumer prices.

Such a change would reduce the federal deficit by many billions since inflation-indexed Social Security pensions and federal employee pensions would not rise so fast, and income-tax brackets would change less, boosting tax revenues.

''This is very politically appealing,'' Cecchetti says.

One reason Baker would like lower unemployment is that it would give employees a better crack at winning higher wages - even if this trims business profits and boosts inflation a little. He notes that after-tax profit rates in 1994 were the highest in 25 years and are even higher this year. This week it was reported that bank profits soared to another record in the second quarter.

Conservatives welcome such high profits as necessary to encourage investment in productivity-increasing modern plant and equipment. Yet net investment as a share of gross domestic product has been at a postwar low in the current recovery, notes Baker. Rather, he says, many companies have invested their profits abroad and in the stock market, either by acquiring their own shares or by purchasing other companies.

One result has been a redistribution of income to the wealthy. The Fed is aiming at not letting unemployment move below its current 5.6 percent rate, and perhaps letting it go to 6 percent. So employees won't find it easy to get raises, Baker notes.