Reagan's inflation damper is working, but GNP and jobs also slip

The public asked for it; the public is getting it. When the electorate voted President Carter out of office last November and chose Ronald Reagan as his replacement, a major reason was its unhappiness with rapidly rising prices. It wanted disinflation -- a reduction in inflation.

Now the seeds planted in the fall are starting to bear fruit. Disinflation has started.

But some weeds have popped up, too -- slower economic growth and higher unemployment. That's no surprise to economists. Their research indicates that, aside from periods of wage and price controls, inflation has only slowed in the past during or after an economic slump. As they see it, this is one of the unpleasant facts of economic life.

The Commerce Department announced Wednesday that the nation's gross national product -- the output of goods and services -- declined by an annual rate of 1.9 percent in the April-June quarter to a $2.881 trillion annual rate. The slowdown, economists figure, is the direct result of a tight monetary policy.

Now the big question is, will the public become impatient? will it get so fed up with high interest rates, slow economic growth, and increasing unemployment that even the semi-independent Federal Reserve System will cringe with the heat of disapproval and relent?

Alan Murray, an economist with Citibank, doesn't expect the Fed to give up its anti-inflation battle in the short run. In fact, until the spectacular $6.9 billion surge in M-1B -- one important measure of the money supply -- announced last week, he was somewhat concerned that the Fed might overdo restraint by not reaching even the floor level of its own monetary targets. "Some of the fears I had disappeared last Friday," he says.

The longer-run mood in the Federal Reserve and the nation is harder to predict. But there are no signs yet of any softening on economic policy in either the Fed or the Reagan administration. Indeed, the Fed's credibility has improved. The financial markets are starting to believe in its determination -- which may result soon in somewhat lower interest rates.

Certainly the testimony given Congress this week by chairman Paul A. Volcker, including the announcement of lower growth targets for money in 1982, must have unnerved the skeptics somewhat.

Such skeptics are still not convinced that the rate of inflation -- which has dropped into the single-digit area -- will remain there.

Comments an economist with Harris Trust & Savings Bank, Chicago: "Some have attributed the progress to luck which is likely to be reversed during the the balance of the year. In fact, luck had little or nothing to do with the recent improvement. Fundamental pressures for inflation have been reduced, and the improvement will carry over into 1982. Moreover, if monetary restraint continues for the year ahead, further significant progress on inflation will occur beyond this year."

For the first five months of this year, consumer prices increased at an 8.5 percent annual rate. That compares with a nearly 12.5 percent average annual increase during 1979 and 1980.

Harris Bank's Dr. Robert J. Genetski explains: "In contrast to popular opinion, inflationary pressures do not stem from oil prices, food prices, interest rates, wages, or any other specific market. Inflation is a monetary phenomenon. The more money the government creates, the more inflation the economy tends to experience. While other factors can and do affect the relationship, the driving force behind inflation is the government's monetary policy."

The creation of money, though highly volatile on a short-term basis, peaked in the summer of 1979 when measured on the basis of two-year annual averages, Dr. Genetski notes. Since it takes about two years for a slowdown in money growth to bring down inflation, that is now beginning to have an impact, he says.

"The best news is that continued restraint on money through June of this year means further progress on the inflation front into early next year," he adds.

Joseph J. McAlinden, president of Argus Research Corporation, an economic and investment research firm, agrees. He suspects that institutional changes such as the nationwide availability and acceptance of negotiable order of withdrawal accounts (NOWs), have obscured the extent of the deceleration in money growth during the past two years. Thus the slowdown in M-1B growth may be more than reported. So the "present moderation in inflation can be expected to extend well into 1982."

Nor does he expect the Fed to panic as it has in the past -- imposing easier money as soon as it sees the whites of the eyes of economic slowdown. And it will have the administration behind monetary restraint. He says: ". . . the administration is likely to take a longer-term perspective and consistently support the central bank in its effort to reduce the rate of money growth -- and , therefore, inflation -- even further."

So far the economists don't expect the GNP slowdown to last long. Citibank's Mr. Murray, for instance, expects positive growth to return by the fourth quarter, if not the third quarter. The consensus of business economists, as reported by Blue Chip Economic Indicators, still anticipates 3.2 percent real growth in GNP next year.

Mr. Murray suspects the slowdown may not even qualify as a recession. Because businessmen have been keeping inventories under tight control, the slowdown does not show the self-feeding tendency of the standard recession. But then, economics remains an inexact science. The slowdown could be worse than expected.