Inflation Helpful in Moderation?

A bit more inflation might not be so bad.

That's the controversial thesis pitched by President Clinton's Council of Economic Advisers (CEA) in its latest annual report.

The report implies that faster economic growth with lower unemployment would be worth the trade-off of a slight bump in inflation.

The Federal Reserve disagrees, taking the mainstream position that higher inflation eats away employment and economic vitality.

The Fed has already raised interest rates once to stop inflation and looks set to raise them again.

The CEA's report rekindles a debate over how much inflation is acceptable.

Many economists side with the Fed. "That's really distressing - the idea that a little more inflation is OK," says University of Dallas economist Michael Cosgrove.

"In the long run, there's no trade-off," Michael Moskow, president of the Federal Reserve Bank of Chicago, said in a speech April 10. "High inflation inevitably leads to fewer jobs."

But the CEA notes that in the short run, policies to lower the inflation rate generally cause higher unemployment, bringing hardship and wasted resources.

The jobless rate has dropped two percentage points since the end of 1992, while the nation's annual output rose about 4 percent. That boost in the economy, notes the CEA's report, amounts to "roughly $300 billion in total, or $3,000 for every American household."

The report also holds that the costs of moderate inflation are "not likely to be large."

"Inflation is often described as if it were inherently harmful, but this is misleading," the CEA says. "People care about the purchasing power of their wages, not about the price level itself."

Mr. Cosgrove counters that consumers, businesses, and financial markets disapprove of price uncertainty. And low, stable rates of inflation encourage economic growth, he adds.

The debate tracks another discussion: How low can unemployment drop before triggering higher wages and inflation?

The CEA report examines the non-accelerating-inflation rate of unemployment (NAIRU) - the balance between inflation and employment. It cites studies finding a weak link, or none, between the rate of economic growth and inflation in nations with low levels of inflation.

Alicia Munnell, one of the three CEA members, says: "This administration has no interest in seeing inflation take off. It is costly to the economy and hard to get under control."

But she does note that there is a "ton of debate" over the real level of NAIRU.

The CEA report argues at some length that changes in the labor market, international competition, and other factors have lowered that key unemployment level from the 6 percent postulated a few years ago. Everybody, Ms. Munnell says, is trying to figure out how low it can go.

Looking at current inflation numbers, with joblessness at about 5.2 percent, she says: "We still don't see any increase in inflation or any harbinger of inflation."