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 record levels, and feed grain crops may yield record harvests in 1977. Ample grain supplies will encourage farmers to market more pork and poultry, and to feed cattle to heavier weights. Meat prices during the next year probably will rise, but by only moderate amounts. Fresh fruit and vegetable crops also have been more ample than had been feared, particularly in light of the drought in the Western states. Prices of coffee and cocoa appear to be coming down. The prospects for a reduction in inflation below the rates we experienced in early 1977 are very good. As a Retail food prices in the next few months should reflect earlier declines at the wholesale level. result, the rise in food prices over the second half of 1977 should be considerably less than the rise in prices of other goods and services. Thus, food prices should moderate the overall rate of inflation. Next year, given average luck with regard to the weather, food prices may rise by no more than the increase in the general price level. I am pleased to appear before you today to discuss the Council on Wage and Price Stability. The legislation to extend the Council's authorization for two years is of The Council is a central tool in this Administration's efforts to control and reduce the rate of inflation. We strongly endorse the legislation before this Committee. 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 |