Big Economic Expansion Threatens Gains Against Inflation, Some Analysts Contend
NEW YORK -- The economy's vigorous expansion is threatening to undermine the nation's hard-won gains against inflation, according to a small but growing number of analysts. And that could mean further increases in interest rates.</br></br>In some industries, factories already are operating at close to capacity and price increases are proliferating, these economists said. Although inflation isn't likely to return to double-digit territory, some analysts said they foresee consumer prices rising at a 6%-to-7% annual clip later this year, up sharply from last year's 3.8% increase.</br></br>Moreover, some economists predicted that the U.S. dollar will tumble in the foreign-exchange markets this year. That would make imported goods more expensive in the U.S., intensifying inflationary pressures. As the inflation rate rises, investors will demand higher interest rates to compensate for the loss of the dollar's buying power, these analysts said.</br></br>The dollar's fate "is the wild card in the outlook for inflation and interest rates," said David Hale, chief economist at Kemper Financial Services Inc., Chicago. "The dollar will fall at least 10%" this year against other major currencies, he contended. There is an even chance that the dollar could plunge 20%, he added.</br></br>Mr. Hale predicted that the inflation rate will rise to between 5% and 6% by autumn. The closely watched interest rate on federal funds, which has hovered at about 9 1/2% in recent months, will rise to the 10% to 11% area by year end, he said. The rate on federal funds, which are reserves that banks lend each other, strongly influences other interest rates.