BPEA | 1973 No. 1

The Current Inflation: Malign Neglect?

Barry P. Bosworth and
Barry P. Bosworth Nonresident Senior Fellow - Economic Studies

John Farmer
John Farmer The Brookings Institution

1973, No. 1

THE UNITED STATES IS CURRENTLY EXPERIENCING its worsti nflation since the outbreak of the Korean war in 1950. In the first four months of 1973, consumer prices have risen at an annual rate of 8.5 percent and wholesale prices have increased at a phenomenal 19 percent rate. The acceleration of the inflation has resulted in sharp criticism of the administration’s antiinflationary policy. But the critics have not rallied around a single policy alternative. Many have advocated a return to more stringent controls from the relaxed controls of Phase III, which started in January 1973. Proposals vary from modified versions of Phase II to a general freeze on all wages and prices. In its two most notable actions since the start of Phase III, the administration froze retail prices of most meats in April, and in May instituted prenotification requirements for price increases by the largest firms—firms with earned sales over $250 million—if such increases raise the average price of all products sold by the firm by more than 1.5 percent over the authorized levels prevailing at the end of Phase II. At the other extreme, some critics have attempted to blame all of the nation’s problems on the controls themselves. They have advocated an end to all direct attempts to restrain prices and wages. As an alternativet hey propose a more restrictive monetary and fiscal policy, controlling inflation by maintaining a larger margin of unemployed workers and idle capacity.