10/14/96 PRICE PEACE

PRICE PEACE

THE DEATH OF INFLATION
Surviving & Thriving in the Zero Era
By Roger Bootle
Nicholas Brealey -- 244pp -- $25

Even if you don't follow monetary policy closely, you have probably sensed the recent shift in the conundrum facing central bankers. For the first time in a generation, nearly all industrial countries have brought their annual inflation rates under 3%. The big question now is whether inflation is yesterday's problem and if it's safe to let economies run at higher levels to promote faster growth and create more jobs.
To Roger Bootle, the London-based chief economist of Hongkong & Shanghai Banking Corp., the answer is a resounding yes. He believes there are so many controlling forces affecting the world's economies that inflation can't rear up again. Among the most powerful constraints are those known collectively as globalization: competition from low-cost producers; the spread of labor-saving technology; and the availability of foreign capital to entrepreneurs, meaning greater rivalry at home.
There are other forces at work. When wages don't rise, consumers are more price-sensitive. So companies can't pass along price increases, which means they are less willing to accept a supplier's price hike, and on and on.
Bootle is not the first to recognize the straitjacket on prices. But he may be first to claim that not only is inflation dead for good but that the danger now is with central bankers causing disinflation, or periods where prices fall and producers lose money before their goods even hit the street.
Last spring, when this book appeared in Europe, economists pooh-poohed Bootle's Big Idea. And the inflation-phobic bond markets certainly don't buy it. But recent events have proved Boodle more right than wrong. Witness the Federal Reserve Board's decision on Sept. 24 not to raise interest rates, even though key statistics, such as an ever-tightening labor market, told them it was time to step on the brakes. Just as America's 5.1% jobless rate hasn't put upward pressure on wages, so has Europe seen mystifying occurrences: When Britain devalued the pound in 1992, there was no resurgence of inflation from higher-priced imports, as had happened in numerous past devaluations.
Whatever you think of Bootle's economic theories--and lay readers shouldn't find them overly difficult to wade through--there's no doubt inflation is less of a problem. That's what makes the second half of Bootle's book, in which he offers advice for readjusting your head to a post-inflation world, the more riveting. He cautions readers, for example, to avoid debt, since rising prices no longer will erode its real value and salaries won't be rising to make debt reduction bearable. And don't be deceived by ``low'' interest rates of 6% or so. Absent inflation, that's a very high rate. Avoid investing in art and antiques, the value of which won't rise much. Don't count on 10% rates of return on your pension fund. And when buying a house, think of it as a place to live, not an investment. These are issues to ponder, even if you think inflation is just playing dead.
By Paula Dwyer