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Consumer price rise slows further in 1992.

The Consumer Price Index for All Urban Consumers (CPI-U) rose 2.9 percent in 1992, slowing from its already relatively languid 3.1-percent pace in 1991(1) The 1992 rise was the lowest annual rate of increase since a 1.1-percent rise in 1986 and was the second smallest since 1965. The 1990 advance of 6.1 percent, propelled by a sharp escalation in petroleum-based energy prices following the Iraqi invasion of Kuwait in August of that year, was significantly higher than the average rate of increase of 5.1 percent during the 1980's. While the deceleration in 1991 was largely the result of the downturn in petroleum-based energy prices, the further moderation in 1992 was more broadly based. Even though energy prices increased again (indeed, the upturn in gasoline prices caused a turnaround in the transportation component of the index), prices for each of the other major expenditure groups rose less in 1992 than during the preceding year.

The food index, which rose 1.9 percent in 1991, its smallest advance since a 0.5-percent increase in 1976, slowed even further, to a 1.5-percent rise, in 1992. The 3.4-percent rise in this component over the past 2 calendar years was the smallest since the 2-year period ended December 1964. More noteworthy was the deceleration in the index for all items less food and energy. After a 4.4-percent rise in 1991, this index advanced 3.3 percent in 1992, its smallest increase since a 3.0-percent rise in 1972, during a period of price controls.

The economy

Sluggish economic conditions were an important cause of 1992's moderate price rise. Although the recession that began in July 1990 ended officially in March 1991, the delay between the end of the recession and its announcement, in December 1992, was the result of the sluggishness of the recovery. Unemployment reached an 8-year high of 7.7 percent in June 1992 and then began to decline slowly, ending the year at 7.3 percent. The number of private sector jobs in December remained 1.7 million below the prerecession peak. Record numbers of bankruptcies of businesses and individuals continued to be filed during most of 1992.

An indication of possible future economic improvement, however, was shown in the rise in the government's index of leading economic indicators during the last 3 months of the year. The December increase of 1.7 percent was the largest in nearly a decade.

The cost of labor and materials remained relatively stable during the year. Total labor compensation costs paid by U.S. nonfarm business employers (which include wages, salaries, and benefits paid to their employees) increased 3.7 percent in 1992, after advancing 4.2 percent in 1991. In addition, productivity was up 3.2 percent over the past year, offsetting most of the rise in hourly compensation. As a result, labor costs per unit of output rose only 0.4 percent from 1991 (fourth quarter to fourth quarter). The Producer Price Index (PPI)for intermediate materials, supplies, and components rose only 1.1 percent; the PH for capital equipment rose only 1.6 percent; and long-term interest rates remained relatively low, keeping the cost of financing capital equipment purchases moderate.

All items less food and energy

The index for items other than the volatile food and energy components, which is often used as a measure of the underlying rate of consumer inflation, rose 3.3 percent in 1992. This was the smallest rise in this index since 1972, during price controls. It was also significantly lower than the 4.5-percent average annual increase in this component over the 10 years ended 1991. The slowdown in 1992 was evident in both commodity and service prices, with the index for services less energy accounting for slightly more than half of the deceleration in the index for all items less food and energy. A smaller rise in rent of shelter compared with the previous year's increase-2.9 percent versus 3.9 percent-accounted for two-thirds of the deceleration in the index for services less energy. Slowdowns in the growth of prices for apparel commodities and alcoholic beverages were responsible for about two-thirds of the deceleration in the index for commodities less food and energy.

Shelter and other selected household costs. The sluggish economy and the slumping housing market caused further moderation in the costs for shelter. These costs were up 2.9 percent in 1992, after advancing 5.2 percent in 1990 and 3.9 percent in 1991. The 1992 change was the smallest advance since a 2.4-percent rise in 1982, at the depth of the 1981-82 recession. Residential rent rose 2.3 percent in 1992, its smallest annual rise since 1967. Charges for lodging while out of town, which include hotel and motel charges and rent for vacation and resort properties, rose 3.8 percent in 1992, less than half the 8.5-percent increase in 1991 and the smallest rise in this component since a 2.6-percent advance in 1972. Homeowners' costs were up 2.9 percent in 1992, replacing 1991's rise of 3.7 percent as the smallest increase in this component since the rental equivalence approach was adopted in January 1983.(2)

Even some household items, whose prices accelerated in 1991, showed decelerations in 1992. Among these were telephone services, the cost of which had turned up from a 0.4-percent decline in 1990 to a 3.5-percent rise in 1991. In 1992, however, the price of telephone services turned back down to a 0.3-percent decline. Water and sewerage maintenance charges, which had accelerated to a 7.8-percent increase in 1991, slowed to a 6.6-percent pace in 1992. Similarly, after advancing 11.5 percent in 1991, refuse collection charges rose 8.5 percent in 1992. However, charges for cable television services continued their 1991 deceleration, with a 3.7-percent rise in 1992. This slow-down followed double-digit price increases in 2 of the last 5 years and was the smallest rise since this component was first published in January 1983.(2)

Other significant price movements. Apparel and upkeep prices continued to slow in 1992, rising only 1.4 percent after advancing 5.1 percent in 1990 and 3.4 percent in 1991. Relatively slack consumer demand caused many retailers to continue to moderate price increases, to avoid a further softening of sales volume.

Prices of alcoholic beverages slowed to a 2.9-percent rise in 1992, compared with a 9.9-percent advance the preceding year. This higher 1991 figure resulted in part from an increase in the Federal excise tax at the beginning of the year.(3)

Medical care costs, which have increased faster than the overall consumer inflation rate each year since 1980, continued that trend in 1992, rising 6.6 percent. However, this advance represented a continuing slow-down from increases of 9.6 percent in 1990 and 7.9 percent in 1991. Medical care commodities slowed to a 5.2-percent increase, and professional medical services decelerated to a 5.7-percent rise. Costs for hospital and related services rose 8.8 percent in 1992, slightly lower than the 8.9-percent pace posted in 1991, which itself was a slowdown from advances of 11 percent or more in each of the 3 preceding years.

College tuition rose 10.0 percent in 1992, after rising 12.1 percent in 1991. These increases were somewhat higher than the 7.0-percent to 8.6-percent advances that marked each year between 1985 and 1990. Cuts in funding by State governments, which supports many universities, continued to lead to tuition hikes.

Prices for tobacco and smoking products continued to advance substantially, but slowed to an 8.1-percent rise in 1992, after increasing at double-digit rates for 3 straight years. As with alcoholic beverages, the 1991 advance of 11.1 percent in tobacco prices resulted in part from the January 1991 Federal excise tax increase. Price rises for tobacco and smoking products have exceeded the overall consumer inflation rate for 11 years running.

The cost of purchasing a new car dropped in 1992, the result of a sharp decline of 13.9 percent in automobile finance charges and a slowing of price increases for new cars, which were 2.3 percent in 1992, compared with 3.3 percent the previous year. Lower interest rates and the prevalence of promotional rates offered by auto dealers were what lowered the costs of financing a new car. However, prices for used cars accelerated sharply, rising 7.4 percent in 1992, after advancing 2.6 percent in 1991.

Airline fares rose 6.6 percent in 1992, after dropping 6.0 percent in 1991. Most of the advance in 1992 occurred in the last 3 months of the year, after the end of the latest round of fare wars.


After decelerating sharply to a 1.9-percent increase in 1991, the food index slowed further to a 1.5-percent rise in 1992. The 3.4-percent rise in this component over the past 2 years was the smallest since the 2-year period ended December 1964. A slight acceleration in prices for food at home during 1992 was more than offset by a sharp deceleration in prices for restaurant meals and snacks.

Restaurant meals and snacks. Prices for food eaten away from home-that is, food purchased in restaurants, from fast-food outlets, and from vend ing machines-continued to decelerate sharply in 1992, rising 1.4 percent after increases of 4.5 percent in 1990 and 2.9 percent in 1991. The 1.4-percent advance was the smallest increase in this component since a similar one in 1964. Eating establishments kept price increases low to avoid losing customers in the face of a sluggish economy.

Grocery store food. Prices for food purchased in grocery stores and eaten at home rose 1.5 percent in 1992, after advancing 1.3 percent in 1991. Larger price increases were posted for poultry, dairy products, and cereal and bakery products, together with a turnabout from falling to rising meat prices. These increases were partially offset by slowdowns in prices for fruits and vegetables, fish and seafood, and other food at home, together with a larger decline in prices for eggs.

Meat prices rose 0.2 percent in 1992, after declining 2.1 percent in 1991. Poultry prices accelerated in 1992, rising 2.7 percent, after increasing only 0.4 percent the previous year. Prices for fruits and vegetables rose 2.2 percent in 1992, exactly half the 1991 increase. This deceleration was the result of a sharp downturn in prices for fresh fruit, which decreased 3.6 percent after rising between 8.1 percent and 13.4 percent for the previous 5 years. The deceleration was particularly evidenced by downturns in prices for oranges and apples. A return to normal production levels after freezes in the prior 2 years- particularly 1991--increased the supply of oranges, while a somewhat larger apple crop combined with reduced European demand for American apples to increase the availability of apples. On the other hand, prices for fresh vegetables-particularly tomatoes-and processed fruits and vegetables accelerated. By contrast, egg prices declined for the third year in a row in 1992. The 4.7-percent drop was slightly larger than the 4.6-percent fall in 1990 and still larger than the 4.0-percent decline in 1991.


Energy price trends in 1992 reflected a return to more normal conditions than in recent years. Prices turned back up in 1992, rising 2.0 percent, after an abrupt drop of 7.4 percent in 1991. The turnaround was due to an acceleration in the prices of petroleum-based energy commodities, which rose 1.2 percent in 1992 after declining 16.1 percent in 1991. Gasoline prices rose 2.0 percent. The sharp energy price drop in 1991 followed a large price increase in 1990. (The Iraqi invasion of Kuwait in late 1990 drove up crude oil prices.) In early 1992, the Organization of Petroleum Exporting Countries (OPEC) tried, with limited success, to regulate the supply of crude oil. Partially offsetting the acceleration in energy commodity prices was a moderation in prices for energy services. A sharp deceleration was posted in prices for electricity, which rose only 1.7 percent on the heels of a 5.0-percent advance in 1991.

Summary and outlook

The further deceleration of inflation in 1992 was broadly based. The index excluding the volatile food and energy components slowed to a rate not seen since 1972, the middle of the price control era of the early 1970's. A number of components decelerated to slow rates of increase last occurring in the early 1970's and, in some cases, the early 1960's. Many factors suggest that consumer price rises may continue to be moderate. Unemployment rates over 7 percent mean that there is considerable room for the economy to grow before tight labor markets push up wages. Further room for growth without significant inflation is provided by a capacity utilization rate 5 points below the long-term average. Relatively low price increases for intermediate materials and capital goods, as well as low long-term interest rates, contribute to minimal cost pressures.

The rates of change for selected expenditure categories over the past 10 years are shown in table 1.



(1) Annual percent changes are from December to December, unless otherwise noted.

(2) See Bureau of Labor Statistics,

"Changing the Homeownership Component of the Consumer Price Index to Rental Equivalence," CPI Detailed Report, January 1983, pp. 7-13.

(3) The Federal excise tax increase was mandated in the Omnibus Budget Reconciliation Act of 1990.

Richard C. Bahr is an economist in the Division of Consumer Prices and Price Indexes, Office of Prices and Living Conditions, Bureau of Labor Statistics.
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Author:Bahr, Richard C.
Publication:Monthly Labor Review
Date:May 1, 1993
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