Academic journal article Monthly Labor Review

Inflation Fueled by Oil Prices in First 9 Months of 1987

Academic journal article Monthly Labor Review

Inflation Fueled by Oil Prices in First 9 Months of 1987

Article excerpt

Inflation fueled by oil prices in first 9 months of 1987

Inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), increased at a seasonablly adjusted annual rate of 4.8 percent during the first 9 months of 1987. This increase, although slowing considerably between the first and third quarters, was notably larger than the 1.1-percent rise in 1986 and the advances of about 4 percent in each of the 4 preceding years.

The marked turnaround in energy prices--up at an annual rate of 12.6 percent in the first 9 months of this year after declaring 19.7 percent in 1986--was the primary factor in the larger increase in the overall index. However, the rate of the advance of energy prices decelerated sharply quarter by quarter in 1987, from an annual rate of 26.1 percent to 7.9 percent and, finally, to 5.0 percent in the third quarter.

The CPI excluding energy also rose at a more rapid pace in the first 9 months of 1987. Although the pace moderated between the first and third quarters, this slowdown was not as pronounced as that for energy. Prices for nonfood-nonenergy commodities picked up quite rapidly, with the largest advances posted for clothing and used cars. During the first 9 months of 1987, the indexes for food and shelter each advanced at about the same rates as in the preceding year. Charges for other services, however, slowed over the same period. The annual rates of price change for these groups and their relative impact on the All-Items index during the last several years and the first 9 months of 1987 are shown in table 1.

Current status

Over the first 9 months of this year, as in all of 1986, movements in oil prices have dominated the behavior of the CPI. If the heightened etensions in the Persian Gulf do not disrupt the flow of oil, however, the influence of this component seems likely to continue to diminish in the coming months. Food price increases also should slow.

Aggregate measures of material and labor costs appear to have bottomed out, but do not pose an immediate cause for concern. The Producer Price Index (PPI) for crude nonfood materials other than fuels did rise sharply in the first 9 momths of 1987, and that for intermediate materials less food and energy advanced at a 4.3-percent rate. The index for finished good less food and energy, however, has not yet accelerated.

Measures of labor costs indicate a lack of pressure on prices. The Bureau's Employment Cost Index increased only 3.4 percent over the year ended in September 1987. The 1.1-percent reduction in the unemployment rate over the past 12 months is likely to result in some upward pressure on labor costs, but it is expected to be moderate and gradual. In addition, capacity utilization has remained very steady throughout 1987 at rates significantly below their optimal level.

Food. Prices prid by consumers for food rose at a 3.4-percent annual rate in the first 9 months of 1987. While about the same as recent annual increases, this change represents a slowdown from the sharp advance in the second half of 1986. That increase followed a severe drought in the southeastern part of the country in late spring of 1986, which partially accounted for sharp hikes in prices for fresh fruits and vegetables, meats, poultry, and eggs. The index for fresh fruits and vegetables rose even more rapidly in the first half of 1987, but then declined sharply in the third quarter, resulting in a 5.8-percent annual rate of advance for the first 9 months. Prices for tomatoes, potatoes, bananas, and the other fresh fruits category, which rose substantially during the last hals of 1986, declined or decelerated sharply in 1987. On the other hand, prices for lettuce, other fresh vegetables, and apples accelerated in 1987, while those for oranges rose sharply over the entire period since mid-1986.

The slower advance in the food component in 1987, relative to the second half of 1986, was primarily due to a decline in prices for poultry and a much smaller increase in those for pork--items whose prices had been greatly influenced by the 1986 drought. …

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