Prices and Wages in the Recession

Report Outline
Inflation in the Midst of Recession
Reasons for Present Price Inflexibility
Price-Wage Spiral Since World War II
Changes in Making of Prices and Wages
Special Focus

Inflation in the Midst of Recession

Anomaly of Rising Prices in Business Slump

Advance of the Consumer Price Index to another record high in April—eighth month of the worst recession since the 1930s—pointed up once more the puzzling anomaly of steadily rising prices in a period of sharply reduced business activity. A recession results from inadequate demand for the supply of goods and services which the country can provide with its labor force fully employed. Consequently, it might be expected that producers, conforming to the fundamental economic law of supply and demand, would have long since lowered prices to stimulate purchasing. On the contrary, consumer prices as reflected in the C.P.I. have been climbing from one new monthly peak to another.

The present round of price inflation, dating from the spring of 1956, is the third since World War II. Until March 1956, when the price index stood at 114.6 per cent of the 1947–49 average, it had not deviated more than one percentage point either way since the summer of 1952. But in the 20 months from August 1956 to April 1958, the index rose in every month except October and December 1957, and in those two months it remained stationary. At 123.5 in April of this year, the index was 2.5 points above its level of 121.0 in August 1957 when the business recession began.

Commissioner of Labor Statistics Ewan Clague said on May 22 that the current round of inflation had “shot its bolt.” He added: “There's no question about it—the big rises are now over.” However, Clague took care to avoid giving the impression that he expected the C.P.I. to fall; he predicted only that it would soon tend to level off. There is growing fear that if living costs no more than level off, another inflationary spiral can be expected when the upswing is well under way.