A half-year pause in inflation: its antecedents and structure - Consumer price index suggests lowest inflation rate in 20 years

Monthly Labor Review, Oct, 1986 by John F. Early, Walter Lane, Philip Sturm

The slowdown in food prices preceded the deceleration in the overall CPI. For the 12-month period ended in September 1981, grocery store food prices had increased 5.5 percent, a rate half that of the overall index. Increases in each of the following 4 years were also less than those for the overall index. For the September 1981 to June 1986 period, grocery store food prices advanced at an average annual rate of 2.1 percent and the overall food component at a 2.8-percent rate.

The shelter component registered steep advances throughout most of the period from 1978 through September 1981. The rate of increase fell off sharply beginning in the fourth quarter of 1981, principally due to the behavior of house prices and mortgage interest rates, and advanced at an annual rate of 2.2 percent from September 1981 through December 1982. Until January 1983, the CPI used an asset approach to measure shelter costs of homeowners. The asset treatment covered house prices, mortgage interest rates, property insurance, property taxes, and maintenance and repair costs. In January 1983, BLS introduced an improved measure of shelter costs for homeowners in the CPI-U, using a rental equivalence approach. During the first 3 1/2 years of the new measure, shelter costs rose at an annual rate of 5.3 percent.

Energy costs declined at an annual rate of 2.1 percent for the 57-month period through June 1986, compared with an increase at a 22.9-percent rate in the 33-month period from December 1978 to September 1981. Although charges for gas and electricity continued to increase at double-digit rates through 1982, they slowed considerably beginning in 1983, rising at an annual rate of 2.6 percent in the 42 months ended in June 1986. Prices for petroleum products peaked in early 1981 and then generally declined, with the exception of temporary spurts associated with short-term shortages and a 5-cent-a-gallon gasoline tax increase in April 1983. The sharpest drop occurred during the first 6 months of 1986. As of June 1986, fuel oil prices were 35.2 percent lower and gasoline prices 31.2 percent below their 1981 peak levels.

The index for items other than food, shelter, and energy slowed more gradually than the excluded components. The price moderation in this group has been steady since 1981, when these prices rose, on average, by 9.4 percent. They increased less each year than in the preceding one, and by the end of 1985 the annual change was 3.7 percent. Within the group, however, price movements for commodities and services have diverged. Intially, both groups slowed from their peak rates; further deceleration has occurred primarily in the goods sector, however, with service prices continuing to advance at a rate of more than 5 percent.

Status at midyear

Over the first 6 months of 1986, plummeting oil prices have dominated the movement of the CPI. Such dramatic influence by a single component seems less likely in the coming months, but aggregate indicators of both material and labor costs portend continued consumer price moderation. Producer prices for nonenergy commodities at the crude, intermediate, and finished stages of processing have either declined or increased very moderately over the past 12 months. Measures of labor costs also indicate a lack of current pressure on prices. The Employment Cost Index has decelerated steadily since peaking at near double-digit rates in 1980, with total compensation for private industry workers advancing by only 3.8 percent in the 12 months ended in June 1986. In addition, sluggish growth in output in the first half of 1986, with less than full utilization of resources--at midyear, capacity utilization rates were less than 79 percent and unemployment stood just under 7 percent--would appear to preclude any immediate cost pressures.