It has become fashionable to attribute accelerating inflation to the Carter administration's zeal in bringing the economy out of recession, to a prodigal Congress appeasing special interests and to an overly expansionist monetary policy. The administration's critics compare last year's 13.3 percent inflation rate, measured by the Consumer Price Index, with the 4.8 percent inflation of 1976, the year before the Carter administration took office.
But in reality, budget policy and monetary expansion are not the causes of the difference between the inflation rates in 1976 and 1979. In fact, had the Bureau of Labor Statistics, OPEC, the Fed and the weather not favored 1976, the inflation rates would have been almost the same in the two years.
First, the two inflation figures do not even come from the same index. In January 1978, the Bureau of Labor Statistics replaced the old Consumer Price Index (CPI) with a new one, the CPI-U. The new index had different weights applied to price increases for individual goods and services. The 4.8 percent figure for 1976 applies to the CPI, while the 13.3 percent applies to the CPI-U. The 1976 price increase for the CPI-U is 5.2 percent, not 4.8 percent.
The world price of crude petroleum did not change between the fourth quarter of 1975 and the fourth quarter of 1976, and the price of domestic crude rose only 71 cents a barrel, or 9 percent. Last year, the world price of crude rose $8.88 per barrel, or 70 percent, and the price of domestic crude rose 72 percent. The direct impacts on the CPI-U in terms of higher gasoline and home fuel prices paid by consumers were very large in 1979. If gasoline and home fuel prices had risen by the same percentages in 1976 as they did in 1979, the CPI-U would have increased 7.9 percent in 1976.
Last year's increases in mortgage interest rates were primarily the results of Federal Reserve responses to OPEC price increases, and reflected a general tightening of credit. In 1976, mortgage interest rates were declining from the high levels reached during the 1974-75 period. If mortgage interest rates had risen as much in 1976 as they did in 1979, the CPI-U would have risen by 1.5 more percentage points that year. This, combined with the gasoline and home fuel adjustment, would have made the rise 9.4 percent.
Food prices increased very little in 1976, as the index for cereals and bakery products and the index for meats, poultry, fish and eggs declined following extremely rapid inflation during the previous four years. Last year was not a bad year for food prices, but the increase did not pull down the CPI-U increase as much in 1979 as it did in 1976. If food prices had risen by as much in 1976 as they did in 1979, the CPI-U would have risen by 1.6 more percentage points, bringing the total to 11 percent.
Had 1976 been characterized by the same external developments as occurred in 1979 and had the same index been used to measure inflation, the CPI-U inflation during 1976 would have been in the double-digit category and not much lower than the 1979 rate. Secondary impacts of the external factors, such as higher fuel and interest costs paid by businesses and passed on in higher prices to consumers, could easily account for the small remaining difference in inflation between the two years.
In theory, inflation means an increase in the "general" price level, implying a widespread, across-the-board rise in many prices in the economy. In fact, we measure inflation by price indexes that rise as the result of special factors as well as general price pressures. When prices of energy are raised to discourage consumption and interest rates are increased to slow the growth in the money supply, the index will inevitably increase. This phenomenon is not restricted to the United States. Since 1973, the increase in energy prices and the higher interest rates used to reduce money supply growth have led to a worldwide inflation that threatens the economic stability of the industrial world. The OECD reckons that consumer price inflation is now approaching the record levels last reached when oil prices and interest rates zoomed after the 1973 Middle East war.
There is no question that inflation today is gaining momentum and needs urgently to be brought under control. But naive comparisons of price statistics from one year to the next are quite misleading indicators of the source of the problem, not to mention poor guides to the appropriate anti-inflation policy. Whether inflation moderates or picks up steam later this year may be more related to energy prices, interest rates and other special factors than to underlying pressures on the economy.
One final point: the 1976 experience, in which we had temporary relief from inflation because of favorable special factors, shows that a quick fix such as a temporary freeze or a recession to break the inflation psychology will not work. Like the Nixon controls, the effects of the 4.8 percent inflation rate wore off quickly. The solution will require a working incomes policy and structural change as called for in the president's new policy.