Economic weakening and excess capacity in most areas mean inflation is unlikely to be a problem in the immediate future, some market economists agree.
In fact, the economists seem more concerned about the prospect of economic slowing than about inflation.
"If a significant rise in the inflation rate does result this year it will be one of the most anticipated inflationary episodes ever," wrote James M. Paulsen, senior managing director, Investors Management Group, Des Moines, Iowa, in the firm's Economic & Market Survey.
"(I)f material inflation does not arise, or even more surprising, a recession occurs before it does, it will represent the second major inflation scare of this recovery (1994 was the first) without any inflation. .*.*. We remain convinced that investors should not worry about inflation until everyone else stops worrying about it. This hasn't occurred yet.
"If there is an inflation problem, it is probably in the labor market. But we doubt that higher wages could be passed on, so that even higher wage inflation would not likely translate into rising overall inflation. Rather, at this juncture, a rise in wages would more likely just cut into corporate profits, potentially exacerbating an already weakening trend of profitability."
Mr. Paulsen noted that while the labor market is getting tight, overall economic growth is not that strong, and that the elasticity of the labor force is unusually large. With more than 1 million discouraged workers no longer looking for work, an acceleration in job growth would bring many "out of the woodwork," he wrote.
A report by the Leuthold Group, Minneapolis, said there was no significant sign of trouble on the inflation front at this point and predicted a recession is likely to begin in early 1997.
"The current economy seems to be progressing at an ideal rate, not too hot and not too cold. We are, however, skeptical that this best of both worlds scenario will be maintained. With Clinton looking like the winner in the presidential race, it would be good politics for an economic slowdown to develop in 1997. Then, by the next election the economy should be back in an expansion mode."
Mike Farrell, economist at Aeltus Investment Management, Hartford, Conn., also sees a possible recession looming.
Writing in the Aeltus Weekly, Mr. Farrell noted a measure of bank loan officers' willingness to make loans recently went negative for the first time since 1990.
"Interestingly, this indicator has never turned negative when a recession did not follow within a year of the triggering event," he wrote.
According to a report by International Strategy and Investment, a New York economic consulting firm headed by Edward S. Hyman, the economy accelerated in August but appeared to be slowing again in September.
"Both autos and housing have plateaued, at best. Consumers are debt-heavy. Capital spending is in a slowing trend along with corporate profits. Government spending is likely to remain low. The yield curve is consistent with 1% to 2% real GDP growth," according to ISI's weekly economic report for Sept. 16.
The ISI report said its model predicted a year-over-year real gross domestic product growth rate of just 2% in the third quarter.
It noted retail sales have increased at an annual rate of just 1.6% during the past six months, the price of gold is down, the dollar is up, and two measures of money supply, MZM and M2 have both slowed.
The ISI report said there are problems ahead as indicated by the fact that banks are writing off more bad loans and credit card debt has reached its highest level since the 1992 recession.
"Delinquencies and bankruptcies seem likely to get worse, at least until consumer installment debt slows significantly, or is liquidated for a few months," the report said. "It continued to increase at an unsustainable 8% rate in July."
The ISI report predicted the Federal Reserve Bank would not raise interest rates in September or November.
The economic research department of the Northern Trust Co., Chicago, dissents on the inflation outlook and expects Federal Reserve Bank interest rate moves to choke off inflation and prompt economic slowing in 1997.
In a report titled "It's Time for the Fed to Take the Punch Bowl Away", Northern Trust economists Paul Kasriel and Asha Bangalore wrote "the current behavior of the labor market suggests the time is growing ripe for price increases across the broad spectrum of goods and services .*.*. This is why we think that the acceleration of wage rates in recent months is symptomatic of a higher inflation environment."
The economists expect the Federal Reserve to raise interest rates and "we think that the (Fed) funds rate will be about 75 b.p. (basis points) higher, or at a level of 6%, by the end of the first quarter of 1997."
If the Fed does raise rates in such a manner, "we believe the economy will decelerate below 'cruising speed' in the second half of 1997, and that the inlation concerns will ebb."
According to Insight Capital Research & Management, Walnut Creek, Calif., the market will continue to be marked by short-term fluctuations until there is conclusive evidence that inflation remains in check and the economy is slowing.
"In the aftermath of the recent rally, most stocks are now fairly valued. This fact, coupled with the uncertainty regarding interest rates, means the quick run-up we have experienced leaves stocks vulnerable to a pullback in the short term," a report said.
"Stocks could back off as much as 5%, but not much more than that."