I want to have a frank talk with you tonight about our most serious domestic problem. That problem is inflation. Inflation can threaten all the economic gains we have made, and it can stand in the way of what we want to achieve in the future.

This has been a longtime threat.

For the last ten years, the annual inflation rate in the United States has averaged 6 1/2 percent, and during the three years before my inauguration it had increased to an average of 8 percent.

Inflation has, therefore, been a serious problem for me ever since I became President. We have tried to control it, but we have not been successful. It is time for all of us to make a greater and a more coordinated effort.

If inflation gets worse, several things will happen. Your purchasing power will continue to decline, and most of the burden will fall on those who can least afford it. Our national productivity will suffer. The value of our dollar will continue to fall in world trade.

We have made good progress in putting our people back to work over the past 21 months. We have created more than 6 million new jobs for American workers. We have reduced the unemployment rate by about 25 percent, and we will continue our efforts to reduce unemployment further, especially among our young people and minorities.

But I must tell you tonight that inflation threatens this progress. If we do not get inflation under control, we will not be able to reduce unemployment further, and we may even slide backward.

Inflation is obviously a serious problem. What is the solution?

I do not have all the answers. Nobody does . . .

I have spent many hours in these last few months, reviewing with my own advisers and with a number of outside experts every proposal, every suggestion, every possibility for eliminating inflation.

If there is one thing I have learned beyond any doubt, it is that there is no single solution for inflation.

What we have, instead, is a number of partial remedies. Some of them will help, some may not. But we have no choice but to use the best approaches we have - and to maintain a constant search for additional steps which may be effective.

I want to discuss with you tonight some of the approaches we have been able to develop. They involve action by government, business, labor, and every other sector of our economy . . .

I will concentrate my efforts within the government. We know that government is not the only cause of inflation. But it is one of the causes, and government does set an example. Therefore, it must take the lead in fiscal restraint.

We are going to hold down government spending, reduce the budget deficit, and eliminate government waste.

We will slash federal hiring and cut the federal workforce.

We will eliminate needless regulations.

We will bring more competition back to our economy.

And we will oppose any further reduction in federal income taxes until we have convincing prospects that inflation will be controlled . . .

The federal government deficit is too high. Our people are simply sick and tired of wasteful federal spending and the inflation it brings with it.

We have already had some success. We have brought the deficit down by one-third since I ran for President - from more than $86 billion in fiscal year 1976, to about $40 billion in fiscal year 1979 - a reduction of more than $25 billion in just three years.

Reducing the deficit will require difficult and unpleasant decisions.

We must face a time of national austerity. Hard choices are necessary if we want to avoid consequences that are even worse . . .

To keep the government to a manageable size, I am tonight ordering a reduction in federal hiring. This order will mean a reduction of more than 20,000 in the number of permanent federal employees already budgeted for this fiscal year, and I will cut the total size of the federal workforce.

I have already placed a 5.5 percent cap on the pay increase for federal employees, and federal executive officers are receiving no pay increases at all.

It is not enough just to control government deficits, spending, and hiring. We must also control the costs of government regulations . . .

Where regulations are essential, they must be efficient. Where they fight inflation they should be encouraged. Where they are unnecessary, they should be removed.

Early this year, I directed federal agencies to eliminate unnecessary regulations and to analyze the costs and benefits of new ones. Today, for instance, the Occupational Safety and Health Administration eliminated nearly 1,000 unnecessary regulations.

Now we can build on this progress.

I have directed a Council of my regulatory departments and agencies to coordinate their regulations to prevent overlapping and duplication.

Most important, the Council will develop a unified calendar of planned major regulations. The calendar will give us, for the first time, a comprehensive list of regulations the federal government is proposing, with their costs and objectives . . .

Of all our weapons against inflation, competition is the most powerful. Without real competition, prices and wages go up - even when demand is going down.

We must therefore work to allow more competition whenever possible so that powerful groups - government, business, labor - must think twice before abusing their economic power . . .

Another reason for inflation is the slowdown in productivity growth. More efficient production is essential if we are to control inflation, make American goods more competitive in world markets, add new jobs, and increase the real incomes of our people.

We have made a start toward improving productivity. The tax bill just passed by the Congress includes many of the investment incentives that I recommended last January. Federal support for research and development will continue to increase, especially for basic research. We will coordinate and strength federal programs that support productivity improvements throughout our economy.

Our government efforts will attack the inflation that hurts most - inflation in the essentials: food, housing, and medical care.

We will continue to use our agricultural policies to sustain farm production, to maintain stable prices, and to keep inflation down.

Rising interest rates have always accompanied inflation. They add further to the costs of business expansion and to what consumers must pay when they buy houses and other consumer items.

The burden of controlling inflation cannot be left to monetary policy alone, which must deal with the problem through tight restrictions on money and credit that push interest rates up.

I will work for a balanced, concerted, and sustained program under which tight budget restraint, private wage and price moderation, and responsible monetary policy support each other.

If successful, we should expect lower inflation and lower interest rates for consumers and businesses alike.

As for medical care, where costs have gone up much faster than the general inflation rate, the most important step we can take is to pass our bill to control hospital costs.

This year, the Senate passed it. Next year I will try again, and I believe the whole Congress will act to hold down hospital costs - if your own members of Congress hear from you . . .

In the last ten years, in our attempts to protect ourselves from inflation, we have developed attitudes and habits that actually keep inflation going once it has begun. Most companies raise their prices because they expect costs to rise. Unions call for large wage settlements because they expect inflation to continue. Because we expect it to happen, it does happen, and once it's started, wages and prices chase each other up and up.

It is like a crowd standing at a foot ball stadium. No one is willing to be the first to sit down.

Except for our lowest paid workers, I am asking all employees in this country to limit their total wage increases to a maximum of seven percent per year. From tonight on, every contract signed and every pay raise granted should meet this standard.

My price limitation will be equally strict. Our basic target for economy wide price increases is 5 3/4 percent. To reach this goal, I am tonight setting a standard for each firm in the nation to hold its price increases at least one-half of a percentage point below what they averaged during 1976 and 1977 . . .