According to the latest Federal Reserve reports from the twelve districts, little evidence of increased wage or price pressures appeared. Indeed, some prices appeared to be falling.

At the same time, higher costs for security, for sanitizing the mails, and for processing real and presumed medical problems must be raising the costs of doing business. Less certain delivery has led to more desire to hold inventories. Concern about depending upon a single location has caused industry to open multiple office and production centers.

In other words, some of the economic efficiencies that have been created in recent years are yielding to more security. Even the increased tension of daily living in these fear infested times is lowering the productivity of American industry.

How is it possible that costs are rising but prices are falling?

At any given level of economic activity, inflationary pressures are higher than they were before September 11. But we no longer are at the same level of economic activity.

Indeed, the available evidence suggests that consumers actually lowered their desire to spend by two percentage points in September at any given level of purchasing power. That shift in consumption moderated into early October. Then consumer apprehension appeared to intensify again as anthrax was added to crashing planes in our list of worries.

If the September shift in consumption persisted indefinitely, economic activity would plunge by more than 3 percent from what otherwise would have occurred and unemployment would rise by several percentage points.

This unusually large impact occurs because the initial change in consumption leaves goods on the shelves that already were produced. Orders for new goods are then cancelled. A flattening order book leads to reduced production of goods. Layoffs ensue. As fewer households have paychecks, further spending is curtailed.

If orders are falling below what current plants can produce, there is little need to build new plants. Who needs new airplanes when 20 percent of those already built are not being used? In short, the initial lost sales are multiplied by the reduced spending from households with lost paychecks and the reduced investment spending by companies who now have ample capacity.

The reason why we are experiencing less inflation is not because inflation is being tamed. Rather, producers would rather lower their prices than shut their plants and retailers would rather slash their prices than have excess inventories after the Christmas season.

In fact, the economy now is more inflation prone at any given level of resource utilization than before September 11. Containing that higher inflationary tendency will be a major economic challenge when the economy finally stabilizes and begins to recover.

Actually, few economists expect the September collapse in spending to persist. First, much of that reduced desire to consume appears to be temporary. Economic damage has been done, but the ultimate reduced desire to consume probably will be less than 0.5%.

Second, lower short term interest rates are reducing the cost of doing business. This partially offsets the higher inefficiencies that are raising the costs of doing business. Third, if economic weakness pushes prices down far enough, those 115 million people that still have a paycheck may begin to exert some of that additional purchasing power.

Furthermore, lower tax liabilities for households and corporations will partially offset the desire to reduce consumption and investment at any given level of economic activity. Also, government spending for defense probably will lead to more total government spending.

When all the above factors are included, the negative effects of the September spending slump should be overcome before the end of this year.

However, not all those forces will offset the inflationary pressures that are being embedded in business practices as we seek greater safety and security. Hopefully, we will be ready to develop the technology that will lower the costs of providing that more secure environment, just as we used technology in the past five years to lower the costs of producing goods and services