Prices Take a Big Tumble

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The Administration deserves credit for policies that have given Americans their first real confidence in more than a decade that inflation is being seriously attacked. The President's tough stand on wages, for example, evidenced by his firing last August of 15,000 professional air traffic controllers for their illegal strike action in a wage dispute, has already helped stiffen the resolve of employers in contract talks. Wages and benefits account for some two-thirds of all U.S. business costs, and the emerging pattern of wage restraint in key industries, such as autos, trucking and airlines, strongly suggests that the slowdown in inflation is now beginning to chip away at the so-called core, or underlying, rate of price increase.

Another Reagan policy that has paid off in lower inflation is the President's decision last January to scrap remaining controls on crude oil and refined-petroleum products. That helped to increase the glut in world oil markets, which caused the drop in world petroleum prices.

The Federal Reserve's tough policy of keeping the growth of money at 2.3% in the past year, compared with 6.6% during the last year of the Carter Administration, has also been an important factor in the success in fighting inflation. Although the Administration has frequently indicated its unhappiness with the erratic growth and contraction of the money supply, the Federal Reserve has persisted in its efforts to slow the growth of money and bring down inflation.

A fortunate set of circumstances on world commodity markets has also been important in combating inflation. Oil prices, which had jumped from about $2 per bbl. in 1972 to a high of more than $40 per bbl. in 1980, have been declining dramatically. Since petroleum is the basic raw material for scores of products, such as gasoline, fertilizers and many chemicals, a drop in its price is felt throughout the whole economy. The falling prices of raw materials, including tin and copper, and farm products have also been slowing the rate of inflation.

There is no doubt that the current recession has been a major factor in controlling runaway prices. With unemployment at the postwar record high of 9%, and interest rates hovering in the middle teens, people have simply been spending less. This has forced everyone from producers to wholesalers to retailers to slash prices in order to sell their products.

Slowing inflation, of course, will force some consumers to make unexpected adjustments. Despite often loud complaints about the effects of surging prices on family finances, creeping inflation has been a silent, and often unrecognized, subsidy that has enabled young families to finance homes, cars and other big-ticket purchases on credit.

In addition, the more than 9 million wage earners covered by contracts containing cost of living adjustment clauses will also feel a transitional pinch. COLAS automatically adjust earnings to help offset inflation, and many people have become accustomed to counting on those illusionary increases in their incomes.