Price Highlights of 1988: Rising Pressures on Consumer Prices

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Price highlights of 1988: rising pressures on consumer prices

For the 12-month period ended in December 1988, the Consumer Price Index for All Urban Consumers (CPI-U) rose 4.4 percent, the same as in 1987. In contrast, the Producer Price Index (PPI) accelerated over the previous year. The PPI for Finished Goods rose 4.0 percent in 1988, compared with 2.2 percent in 1987. The Intermediate Goods index climbed 5.7 percent in 1988, a little more than in the previous year, while the increase in the Crude Goods index slowed to 2.8 percent, from an 8.9-percent surge in 1987. (See table 1.)

In addition to rising materials prices, 1988 saw increasing cost pressures resulting from the fuller utilization of resources. The downward movement (towards 5 percent) in the unemployment rate coincided with an upward move of 4.9 percent in the Employment Cost Index, the largest increase in that measure since 1984. The current high rate of capacity utilization has also exerted pressure on prices.

Consumer prices

While the overall rates of change for the CPI-U were the same in 1987 and 1988, the composition was notably different. Energy costs changed little on average in 1988, after partially rebounding in 1987 from the effects of the 1986 oil glut. Excluding energy, however, the CPI-U advanced 4.7 percent during 1988, compared with a 4.1-percent increase in 1987. Rising food prices were partially responsible for this acceleration--food prices were up 5.2 percent in 1988, the most since 1980, reflecting, in part, the adverse summer weather. Shelter costs increased slightly less than in 1987. The index for all items excluding food, shelter, and energy--up 4.7 percent in 1988--continued to accelerate from its 1986 low of 3.3 percent. Prices for both the other commodities and the other services groups accelerated in 1988. Within the other services group, each component contributed to the larger advance, in particular, automobile finance charges and automobile insurance costs. Price increases for clothing and tobacco products accounted for nearly 40 percent of the rise in the other commodities index.

Food

Retail food prices rose 5.2 percent in 1988, the most since 1980. Grocery store food prices advanced 5.6 percent, following a 3.5-percent rise in 1987. All major grocery store food groups contributed to the acceleration, except fruits and vegetables; even these prices continued to advance (up 6.2 percent in 1988), but not as much as the 12.8-percent rise in 1987.

The CPI for meats, poultry, fish, and eggs rose 5.3 percent in 1988, following a 1.0-percent increase in 1987. Poultry and egg prices rose 17.9 and 16.5 percent, respectively, after declining in 1987. Beef and pork prices increased during the first 6 months of 1988, but slowed or declined in the second half, as higher costs for feed increased the slaughter rates of cattle and hogs. For the 12 months ended in December, beef prices rose 5.6 percent, while pork prices declined 3.1 percent.

The indexes for cereal and bakery products, dairy products, and other food at home each registered its largest increase since 1980, in part due to the summer drought. The adverse weather significantly cut the yields of oats, barley, and wheat, contributing to an 8.4-percent rise in prices for cereals and bakery products. Drought conditions reduced the supply of milk and caused higher retail prices. The index for dairy products rose 4.4 percent in 1988. Reduced supplies of beets and soybeans, induced by the drought, were largely responsible for the increases in the sugar and sweets and the fats and oil components, which led to a 4.8-percent rise in the index for other food at home.

The 1988 increase of 6.2 percent in the index for fruits and vegetables is deceiving. Prices of three of the four major components of this index--fresh fruits, processed fruits, and processed vegetables--increased at double-digit rates. …