Mr. PELOUBET. If I understand it, the President is trying to set the pace by reducing the size of some of the agencies that report to the Executive Office. And I think perhaps in the case of the Council on Wage and Price Stability, that holding the present level of staffing may be a reasonable compromise under the circumstances. The CHAIRMAN. Thank you. Our final witness is the Chairman of the Council of Economic Advisers, Mr. Charles Schultze. STATEMENT OF CHARLES L. SCHULTZE, CHAIRMAN, COUNCIL OF The CHAIRMAN. Yes, he was with Mr. Bosworth earlier. Mr. SCHULTZE. I think it might be useful, Mr. Chairman, you have my statement The CHAIRMAN. We have your statement, and it will be printed in full in the record, if you would like to abbreviate it. Mr. SCHULTZE. I will briefly summarize the first part of it, and then to make sure I do it correctly starting at about page 8, read the part having to do specifically with the Council on Wage and Price Stability. The CHAIRMAN. Very good. Mr. SCHULTZE. In effect the first part of the statement takes a look at the immediate problem of inflation, points out if you look at the overall numbers, it would appear that the rate of inflation on the one hand decelerated significantly in 1976 compared to 1975. And then more recently reaccelerated again. That is the Consumer Price Index as a whole, price increases in 1976 were substantially below the prior year, whereas in the first 5 months of this year they ran at a 10-percent rate. If you look underneath those figures, it turns out that what you probably have been having is that outside of food and energy, the rate of inflation has been running at about 6 percent a year for the past 18 months, with actual stability and even some decreases in food prices pulling you down during 1976 and pushing you up again in early 1977. The CHAIRMAN. That isn't so true, or wasn't so true until last month. The industrial wholesale prices were running at substantially higher than 6 percent. Mr. SCHULTZE. No, sir. If you look at the industrial wholesale prices, excluding food and energy, for the first 5 or 6 months of this year, I think they have run a little over 5 percent for the first 6 months of the year. You got real relief in June, but even prior to that it was 6 percent for those 5 months. If you will excuse me a second, I will get my bible that has the numbers. The CHAIRMAN. An increase of 1.5 in February. I am looking at industrial commodities, wholesale prices. That has to be corrected, because the enumerator is 189. That would be an increase of about 1 percent in February, 1 percent in March, the annual rate right through February, March, and April was about 12 percent a month. Mr. SCHULTZE. What I have done is to look at what has been happening aside from the very sharp ups and down in food and energy, to get WPI industrials excluding energy. That ran at about 6 percent in 1976, and while it flipped up and down, it has been running at an average of a little under that in 1977 so far, a little higher and then a little lower. The major point is what we seem to have had over the past year and a half is kind of an underlying, something like 6 percent, with food prices pushing it below that for awhile and then above that for awhile, and now the food prices are coming down for a couple of months, and rising at a slower rate, and you are still in the neighborhood of 6 percent. We think that in the next 6 months you will find a significantly lower rate of price increase than you had in the first 5 months. We think also there is a very good chance, as we pursue economic policy leading to higher rates of employment, the inflation is not likely to accelerate. We also think, however, that in order to do what all of us want, to get the rate of inflation coming down each year, rather than simply stopping acceleration, there will have to be a lot of action taken by the Government, business, and labor, in order to do that. And we think that the Council on Wage and Price Stability will be an important element in it. And the President's plans for the Council on Wage and Rate Stability reflect that. Let me, if I may, ask you to turn to page 8 of my statement, and I think I can briefly go through that. [The complete statement of Mr. Schultze and a copy of S. 1542 follow:] EXECUTIVE OFFICE OF THE PRESIDENT COUNCIL OF ECONOMIC ADVISERS WASHINGTON, D.C. 20506 TESTIMONY OF CHARLES L. SCHULTZE, CHAIRMAN before the SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS July 19, 1977 I am pleased to appear before you today to discuss The Problem of Inflation Before focusing on the Administration's plans for the Council on Wage and Price Stability, I would like to digress briefly to discuss the problem the Council has been established The Vietnam war inflation of the late 1960s was not fully eradicated before the nation was plunged into the double-digit inflation of 1973 and 1974. The causes of that inflation were many. While the rate of price increase has eased substantially since then, the central problem we face is that the residue of earlier inflation is still with us in greater force than is healthy or desirable. Consumer In 1976 the rate of inflation fell sharply. prices, which had risen 12 percent in 1974 and 7 percent in 1975, rose only 5 percent in 1976. But part of that moderation was temporary, and due to the fact that food price increases in 1976 fell to virtually zero, and energy prices while still rising increased at a far slower pace than in the immediately preceding year. Excluding food and energy, both consumer and wholesale prices rose only modestly less in 1976 than in 1975. Just as movements in food prices tended to lower the rate of inflation in 1976 below its underlying trend, so this winter, as a result of chill weather, fuel bills and food price increases sent the overall indexes soaring again for a few months. The Price Outlook We must achieve lower rates of price increase over the next 12 to 18 months than we experienced in early 1977 if we are to maintain a strong and healthy economy. As I noted earlier, rapidly rising food and fuel prices in early 1977 led to a sharp acceleration in the overall rise of prices. In the first four months of this year, wholesale prices rose at an 11 percent annual rate, while consumer prices rose at an annual rate of 10 percent. We expected this bulge in prices to be temporary, and have forecast a moderation of inflation in the second half Recent developments are consistent with of this year. that expectation. The rate of increase of wholesale prices slowed in May, and wholesale prices actually declined significantly in June. The rise of consumer prices for food was smaller in May than the average of the first four months of 1977. Food price pressures have eased because the U.S. will enjoy very good harvests in 1977, despite weather problems that have plagued various regions. Wheat stocks are at |