Consumer Price Rise Slows in First Half of 1991

Article excerpt

An annual rate of increase of 2.7 percent was the smallest 6-month increase in nearly 5 years; lower prices for petroleum-based products were the chief contributory factor

The Consumer Price Index for All Urban Consumers (CPI-U) increased at a season-Tally adjusted annual rate(1) of 2.7 percent during the first 6 months of 1991-the smallest 6-month rate of increase since December 1986. The rise so far in 1991 compares with annual increases of 6.1 percent in 1990, 4.6 percent in 1989, and 4.4 percent in 1988.(2) (See table 1.)

The modest increase in the first half of 1991 largely reflects the falling prices of petroleum-based energy products. These prices began declining in late 1990 and continued dropping during the first quarter of 1991, following the end of fears of oil shortages in the summer and fall of 1990. Speculation in the oil market, which accompanied these fears, was the driving force in rising petroleum prices. Such speculation was primarily the consequence of Iraq's invasion of Kuwait in August 1990 and the resultant United Nations-sanctioned oil embargo. After crude oil markets stabilized, the prices of motor fuels, household fuel oil prices, and airline fares all declined. (See table 2.) (In part, declining airline fares reflected lower input costs of petroleum-based jet fuel.)

Among the consumer goods and services whose prices contributed considerably to consumer price increases during the first half of 1991 were fresh fruits and fresh vegetables, alcoholic beverages, lodging while out of town, tobacco and smoking products, other utilities and public services, and postage. Excluding fresh fruits and fresh vegetables, the indexes for these goods and services were also principally responsible for the rise in the index for all items less food and energy-an often-used measure of the underlying or core rate of inflation. This index rose at an annual rate of 5.0 percent during the first half of 1991, compared with a 5.2-percent increase for all of 1990. Nonetheless, the high rate of increase in the index for all items less food and energy (relative to the rate of increase in the overall CPI), was influenced largely by factors that represent transitory price increases which do not pose a long-term threat to price stability. Such factors included a rise in Federal excise taxes on alcoholic beverages and a hike in postal rates. The increases in the rates of the remaining items (lodging while out of town, tobacco and smoking products, and other utilities and public services) also do not appear to reflect significant underlying inflationary trends for the economy.

Besides declining oil prices, falling costs of materials and labor input contributed to 199 I's relatively low rate of consumer inflation. The Producer Price Index for crude materials less food and energy fell at a rate of 8.9 percent, and the index for intermediate materials less food and energy decreased at a 1.6-percent rate, during the first 6 months of 1991. Declining labor costs and weak demand during the recession of late 1990 and early 1991 contributed to these drops. Costs to retailers of finished goods less food and energy rose at a 3.3-percent rate, off slightly from their 1990 pace. The civilian unemployment rate, a key indicator of wage and salary pressures, increased from just over 6 percent in December 1990 to 7 percent in June 1991, its highest figure since October 1986. The civilian unemployment rate is a leading indicator of cost-push inflation; rising unemployment signifies a downward pressure on wages and salaries. Total compensation costs in the private sector, as measured by the Employment Cost Index, rose a modest 4.4 percent in the year ended June 1991. This figure compares to a 5.2-percent increase in the year ended June 1990, the month before the recession officially began. Wages and salaries of workers in private industry were up 3.7 percent in the year ended June 1991, decelerating from the 4. …