The Lull in Inflation

March 10, 1952

Evidence has been rapidly accumulating in recent weeks that inflation has come to a temporary halt. The government’s old index of wholesale prices, which rose from 157.3 at the outbreak of the Korean war in June 1950 to a peak of 184 in March a year ago, had fallen in the week ended Feb. 19 to 174.8. The Dow-Jones daily spot commodity price index, which reached as high as 224.61 in February of last year, and as high as 197.85 in early December, had fallen by Feb. 27 of this year to 186.48. On the stock market, industrial shares have declined sharply since the middle of January.

The break in wholesale commodity prices has been pretty general. It has been particularly severe in grains, and in the metals and raw materials—copper, lead, zinc, wool, rubber—that went up most following the outbreak of the Korean war. The severe shortages of steel, aluminum, lead, and copper that appeared to exist a couple of months ago have been easing or disappearing. Spots of unemployment have developed. And in a few lines—cotton textiles, for example—there is a definite depression.

This decline has been the consequence of several main causes:

1—The expectation in recent weeks that a truce would be arrived at in Korea.

2—The deferment of government schedules on many war items.

3—Recognition that previous fears of shortages had been exaggerated. This has brought a halt to “inventory hoarding.” In addition, the need of corporations for cash to pay income-tax installments, or for other purposes, has been causing them to reduce inventories or to sell part of them.

4—Profit margins are now being squeezed by price ceilings on one side and by higher taxes and higher wage demands on the other.

5—In recent months, the Federal Reserve authorities have ceased to follow inflationary policies.

It is the last factor that needs particularly to be emphasized. The banking system has not for a long time been buying long-term 2½ percent government bonds at par or better. On Feb. 20 the Federal Reserve Banks held $22,400,000,000 of government securities, a reduction of $1,250,000,000 from Jan. 2, and the lowest holdings since May of last year. Interest rates have been allowed to creep higher. The rate on short-term bank loans to commercial borrowers, for example, rose from an average of 2.68 in June 1950 to 3.27 in December 1951. The rate on long-term U.S. government bonds was allowed to rise from an average of 2.33 in June of 1950 to an average of 2.70 in December 1951. Total loans of reporting member banks of the Federal Reserve System were $34,633,000,000 on Feb. 20, a decline of $870,000,000 from Dec. 26, compared with an increase of $278,000,000 in the corresponding period a year ago.

To sum up, what has been taking place is a lull in the inflation. The business and price readjustments that have been occurring are unavoidable whenever an inflation is allowed to come to a halt. If the government is now content simply to let things alone; if it does not start pumping new money into the system; if Mr. Truman keeps Federal expenditures in the next fiscal year to the $71,000,000,000 that he expects to raise from present taxes, and does not embark on a course involving a stupendous deficit of $14,000,000,000; and if the War Stabilization Board does not precipitate a new round of wage increases by its steel decision, the inflation will halt in its tracks.

So the present situation is a test of the sincerity of the Administration, of Congress, of farmers and union members, and of businessmen. If they are really opposed to inflation they will not start taking or demanding desperate measures to keep it spiraling upward. The Administration will not ask for a continuation of price control, for there will be no longer any excuse for it. All that Congress will need to do is to remove the temptation from Federal agencies to start inflating again merely by removing their present powers to do so. (For details, see this column, Nov. 26, 1951.)