14 SURVEY OF CURRENT BUSINESS October 1968

Prices in 1968

Rising demand and cost pressuresthis year have brought the largest priceincreases in final markets since theKorean War. The GNP deflator hasrisen 1 percent for five successivequarters. Wholesale industrial prices,after a sharp rise last fall and winter,changed little for several months buthave displayed a renewed advance veryrecently. Farm prices are up this yearafter a decline in 1967.

THE 1968 price rise in final markets isthe largest since the Korean war.The GNP deflator has risen approxi-mately 1 percent each quarter this year,continuing the pattern of sharp ad-vances that set in after the middle of1967. Consumer prices in August were4.3 percent above their year-earlierlevel. Rising farm and wholesale foodprices have intensified this year's priceadvance. Wholesale industrial priceshave shown a mixed pattern—sharpincreases early in the year followed byseveral months of little change and,very recently, a renewed advance.

Price movements have reflected bothdemand and cost pressures. Increasesin wage rates this year have been ex-ceptionally large—considerably in ex-cess of productivity gains—and unitlabor costs have risen sharply over 1967.In general, the buoyant state of demandhas made it easier for cost increasesto be reflected in higher prices and, inmany instances, has permitted profitmargins to expand. The effects of thepolicy of fiscal restraint that wassigned into law in late June are yet to befelt. While the rise in GNP showedsome slowdown in the third quarter,the gain was still substantial enough toprevent any significant retardation inthe price rise.

Industrial pricesAlthough prices of wholesale indus-

trial commodities in September were2K percent higher than they were ayear earlier, most of this rise occurredin late 1967 and early 1968. Industrialprices had been stable during the firsthalf of 1967 when demand was some-what sluggish. With the recovery ineconomic activity after mid-1967 andcontinued advances in unit labor costs,prices resumed their upward move-ment and rose rapidly through thefirst quarter of 1968; from September1967 to March 1968, the advancecame to 2 percent. Over the next 6months, however, the price rise slowedto 0.6 percent, much of which tookplace from August to September. Asthe table below indicates, a lesseningof the price increase this spring andsummer was evident for most broadgroups of industrial commodities, andfor a few groups, price decreases wererecorded.

The advance in industrial pricesfrom September to March was as largea rise over a comparable period as hasoccurred since 1956. It reflected mainlyrising labor costs in manufacturingand a recovery in profit margins whichhad been reduced in the first half of1967 when manufacturing was de-pressed. In addition, special influencesrelating to strikes and strike threats(especially in metals) and the swiftrecovery in homebuilding last yeartemporarily added to the upward thrustof prices. The much slower rise inmanufacturing activity this spring andsummer in the face of continued costincreases apparently put some pressureon margins. In addition, settlementsof labor disputes brought improve-ments in supply conditions and lowerprices for some key commodities.

The recovery of residential buildingactivity last year and early this yearwas a major factor contributing to avery sharp rise in prices of lumber andplywood. Although starts failed to gainafter the first quarter, lumber produc-tion was restricted by a reduced supplyof logs at Western mills (resulting fromlast summer's drought) and by anextended strike—recently ended—atBritish Columbia sawmills. In August,the price index for lumber and woodproducts was 13K percent above thelevel a year earlier. Lumber prices havereceded somewhat since mid-September,with only part of the drop due toseasonal factors. Since last fall, sub-stantial price rises but much smallerthan those for lumber, have also beenreported for such construction-relateditems as nonmetallic mineral products.

Uninterrupted monthly price in-creases over the past year have broughtcombined prices for textiles and apparelto a point 4 percent above their year-earlier level; this is in marked contrastto the annual price changes of less than1 percent in each of the years from1962 to 1967. A significant portion ofthe price rise can be attributed to higherwage rates, in part the result of thehike in minimum wages earlier thisyear and CPI escalator clauses in con-tracts covering large numbers of gar-ment workers. Over the past year,average hourly earnings in textiles andapparel have risen 9 to 10 percent.Textile prices have also reflected highercosts of raw materials, notably rawcotton. The price rise for cotton andsynthetic textiles has shown some slow-down since the spring.

Average Monthly Percent Changes inWholesale Price Indexes

All industrial commodities _ _ _Textile products and apparelHides, skins, leathers, and

leather productsFuels and related products, power.Chemicals and allied products. _

Rubber and rubber productsLumber and wood productsPulp, paper and allied products.Metals and metal products

Machinery and equipmentFurniture and household dura-

blesNonmetallic mineral products. ..Miscellaneous products

Sept.1967-Mar.

1968

0.3.4

.5-.4

.1

.3

.8

.2

.7

.4

.6

.4

.2

Mar.1968-Aug.

1968

!0. 1.3

.3

.1-.1

.21.4-.1-.5

.2

.1

.3

.0

1. Based on March 1968-September 1968 (preliminary).

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October 1968

October 1968

The combined index of machineryand equipment prices has risen 3 per-cent over the past year, about the sameas the increases in 1966 and 1967.Prices rose rapidly last fall and winterfollowing a period of slow advanceearlier in 1967, but the increase hasdiminished since the spring. Despiterising costs, prices of farm machineryhave increased little this year becauseof sluggish demand. Similarly, the

CHART 8

Wholesale PricesOverall advance slowed aftersharp gain last winter

1957-59=100115

: Firm Prdfett ffecessed- ': foods pci Feeds

no

105

95 Hi l t ) Hilt HIM!HIM HI III nH I* Mi>h

noINDUSTRIAL

105

90 H M i h i M j MiUh-iiii n till i MM in hi inn. tunlm

120

115

110

FINISHED

95 "MM11 run1964 1965 1966 1967 1968

Latest data: Top panels, September (preliminary). Other panels, August.

Data: BLS

U.S. Department of Commerce, Office of Business Economics 68-10-8,-

SUEVEY OF CUEEENT BUSINESS

price rise for construction machineryhas slowed down as a result of reducedactivity in heavy construction wheresuch equipment is most common. Incontrast, prices of metalworking andspecial purpose machinery have con-tinued to show steady advances.

Although price reductions amongindustrial commodities have been lim-ited, they have occurred among im-portant commodity groups. The indexof prices for chemicals and alliedproducts, which has been comparativelystable for several years, eased slightlyin each month from May throughAugust, reflecting declines in farmfertilizers and inedible fats and oils,where excess capacity has been a prob-lem; the chemical price index is nohigher now than it was in the summer of1967. However, price boosts announcedin late September will, if sustained, bereflected in the index in the comingmonths. Prices of pulp, paper, andallied products rose moderately lastfall and winter, but eased slightly inthe spring quarter and again this sum-mer because of overcapacity. As in thecase of chemicals, some increase islikely in the index of paper prices thisfall; most newsprint producers beganto raise prices approximately 3 percentin September.

The metals and metal products grouphas also displayed some price weaknessthis summer after very pronounced in-creases last fall and winter. Much ofthe 2% percent decline in prices sincethe spring resulted from a sharp dropin prices of copper products starting inApril. The decline was a reaction to theend of an 8% month strike that hadcaused a sharp runup in prices. Freemarket prices of silver have eased inrecent months, after the substantialadvance that took place when theTreasury abandoned a fixed-price policy.In addition, prices of steel scrap havedeclined considerably since Februaryand at present are close to a post-WorldWar II low. The selective increases forsteel mill products announced by themajor steel producers after the newlabor contract was agreed upon at theend of July did not substantially affectthe wholesale price index in August.

15

Higher farm and food pricesLast year, a rather pronounced de-

crease in farm prices served as a mod-erating influence in the overall pricepicture. Wholesale prices of processedfoods and feeds edged down, and retailprices of food rose less than 1 percent,the smallest annual advance since1959, when prices declined. This yearhas seen a reversal of last year's pattern.Wholesale prices of farm products andfoods rose sharply during the firsthalf, extending the rise that beganlate in 1967; however, prices recededsomewhat this summer if allowance ismade for normal seasonal fluctuations.In the first 9 months of 1968, prices offarm products and foods were 1.8 per-cent above those in the correspondingmonths of 1967. Eetail food prices haveshown a roughly similar pattern, risingmarkedly during the winter and earlyspring but easing slightly during thesummer. For the January-August pe-riod, they were 3.2 percent above thesame months of 1967.

Changes among the various com-modity groups have been mixed. Whole-sale and retail prices of fresh fruits andvegetables declined this summer aftera sharp rise during the winter andspring, which was caused mainly by areduced crop of citrus fruits; prices ofcanned and frozen fruits and vegetableshave not changed much. Larger cropharvests caused a further drop in pricesof grains, and quotations for theseitems are running 13 percent belowlast summer and one-fourth under thelevel of 2 years ago. However, thedecline in grain prices has not beenreflected in wholesale prices of cerealsand bakery products, which have risenin recent months. Meat and poultryprices have moved irregularly highermost of this year.

Food prices normally decline betweenlate summer and yearend, and a dropof at least seasonal proportions islikely this fall. Cattle marketings havecontinued at a high level and hogmarketings have recently increased; inearly October, hog prices had droppedto a 4-month low. Prices of broilers aresomewhat below the year-earlier level.Favorable weather conditions point toa substantial expansion in supplies of

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October 1968

16

vegetables and noncitrus fruits thisfall, and prices for most of these prod-ucts are expected to drop more thanseasonally. However, price declinesarising from improved supplies of foodsmay continue to be partially offset byrising processing and distribution costs.

Consumer price rise acceleratesThe rate of advance in the consumer

price index has shown a considerablestep-up as compared with 1966 and

Consumer PricesThe 4 percent increase so far this year reflectsaccelerated rises in all major groups

Percent Change From Previous Year

ALL ITE

J

VIS

Fl

nFlnnnnf7!pn PI

R~

i__j

1956 58 60 62 64 66 68*

FOOD

- NONDURABLE COMMODITIES LESS FOOD

4 - DURABLE COMMODITIES

-2

6

4

2

la!

SERVICES

1956 58 60 62 64 66 68*

*First 8 months over corresponding period 1967. «- . gic

.U.S. Department of Commerce, Office of Business Economics 68-10-9

SURVEY OF CUREENT BUSINESS

1967. During the first 8 months of 1968,the CPI averaged 4 percent above thecorresponding period of 1967 (chart 9),and in July and August, the year-to-year increase amounted to 4% percent.So far this year, all major commodityand service groups show higher ratesof price advance than those posted in1967. Apart from foods, prices of non-durable commodities have risen sub-stantially, and prices of durable goods,which had been relatively stable for anextended period before last year'sadvance, have increased further in1968. The rise in service prices so farthis year has exceeded the very largeincreases of 1966 and 1967.

Prices of nondurable commoditiesexcluding food increased at about the4 percent rate shown by the overallCPI in the first 8 months of this year.The most prominent item in this gainhas been apparel, where price advanceshave reflected the increases at whole-sale. In August, retail clothing priceswere more than 6 percent above a yearearlier; on a seasonally adjusted basis,the rise during the year showed noevidence of tapering. Price increaseshave been widespread for other non-durable consumer goods so far thisyear, with gains reported for a varietyof items such as textile housefurnish-ings, gasoline, newspapers, tobaccoproducts, and fuel oil.

In the first 8 months, prices of con-sumer durables averaged 3.3 percentabove the corresponding 1967 period;if this rate is maintained for the restof 1968, the full-year advance will bethe largest in more than a decade. Thisyear's increase mainly reflects thegenerally higher level of prices forthe 1968 model cars as compared with1967 models. However, prices of otherdurables are also up substantially.Prices of household durables haveadvanced fairly steadily each monthover the past year and in August were3.4 percent above their year-earlierlevel. These prices had been very stableover an extended period and last yearshowed their first significant rise—about 1% percent—in a decade.

October 1968

The overall price index for durablegoods will soon reflect the increasesthat have been posted for the 1969model cars. After allowance for qualitychanges, the BLS has estimated thatthese boosts averaged about $40 perunit or slightly more than 1 percent.

The accelerated uptrend in consumerservice prices that began in 1966 hasextended through mid-1968. On theaverage, prices in the January-Augustperiod were 5 percent above the year-earlier months; if rents are excluded,the rise in service prices so far thisyear comes to 5.3 percent.

As in other recent years, the rise inthe costs of medical care service hasoutstripped by a considerable marginthe gains in other components of theservice price index. On balance, theseprices have averaged nearly 7% percentabove 1967 levels so far in 1968, withthe most sizable increase in hospitalservice charges. Although no detailedfigures are available, there are severalindications that stepped-up wage in-creases for both professional and non-professional staffs have been a keyfactor in the rise in these charges.

Prices of transportation services areup 3.8 percent so far this year, reflectingsubstantial increases in local transitfares and auto registration fees.Plane fares have edged up as airlinesdiscontinued some promotional arrange-ments, but auto insurance rates, whichhad been rising markedly, have in-creased very little so far in 1968.Prices of household services, excludingrent, have risen mgre than 5 percent onthe average in the first 8 months of1968. This increase is due to sharpadvances in such items as mortgageinterest rates, domestic service chargesfor general housework, and postalrates. Rents have been boosted about2 percent, reflecting lower vacancyrates in the first half of this year;although this represents an accelera-tion from the small increases in otherrecent years, the rent index is still oneof the slowest rising major componentsof the CPI.

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October 1968