Remember WIN?

If your consciousness level exceeded the decibel level of your favorite rock band of the 70s, you recognize WIN as President Gerald Ford’s exhortation to all to Whip Inflation Now.

Over the last few months, current but outgoing Federal Reserve Chairman Alan Greenspan has left no doubt that he will whip inflation now as his Federal Reserve cranked up interest rates. All this while telling us the economy was in fine shape, all things considered. Thus far, the underlying rate of inflation has yet to show many signs of being pushed higher by the surge in oil prices.

Mr. Greenspan and most other Fed officials tend to view higher energy prices as a one-time event, and pay much closer attention to the “core” rate of inflation that excludes energy and food prices. Despite the rise in gasoline prices, the core rate remains tolerable.

Government economic data suggests the economy has the strength necessary to absorb rising energy prices, a hurricane or two, and the interest rate hikes. In November, the government surprised many forecasters by estimating that the economy grew at a rapid clip of 3.8 percent in the third quarter, despite the impact of Hurricane Katrina and skyrocketing fuel prices.

No doubt about it, inflation remains the big gorilla in our economic forest. But the inflation of President Ford’s era, and the inflation Greenspan is jousting are two different inflations. Ford’s battle was with “cost-push” inflation … the type that occurs when companies’ costs go up leaving no alternatives other than raising prices. Hence, costs have “pushed” prices up.

This can happen when workers have wage pricing powers, such as occurs with strong labor unions, and equally strong cost of living benefits in union contracts. If commodity prices increase, companies are forced to raise prices to recover their costs. Businesses may be forced to “price in” interest rate increases, tax increases, along with excise duties on fuel and oil, and changes in currency exchange rates. These can all cause cost-push inflation.

The second type of inflation, “demand-pull,” is the current Fed’s enemy. This inflation results from too much money chasing too few goods. A sure sign of this inflation is a rising GDP and falling unemployment.

Today our economy is primarily service based. Our wage structure remains flexible and out of union control. To better understand the dwindling power of labor, one only has to look at the difficulties organized labor is having trying to organize Wal-Mart workers.

Thirty years ago this was not the case, as organized labor exerted significant leverage to force businesses to raise wages, which in turn exacerbated the impact of rising oil prices.

The recent successful efforts of airlines to cut wages, and Delphi to cut pension benefits signifies even more evidence that we have a flexible wage economy … one where inflation is not likely to be driven by a cost-push wage spiral.

The inflation we face today is more events related (the growing world demand for energy resources) than it is a secular inflation that is likely to increase over time. Fortunately our economy is resilient and flexible enough to adjust to higher energy costs. And, we are productive enough, thanks to the productivity gains brought about by technology, and a better educated and more skilled workforce made to produce the goods and services necessary to keep up with demand.

While it is likely that we will have more rate increases even after Greenspan gives up the reigns of the Fed, I do not believe the inflation we face will be of the WIN variety. And with some attention to investing and saving strategies, our soon to retire Boomers will be able to look forward to more than flipping hamburgers in retirement.