Prices in 1970: The Horizontal Phillips Curve?

This article examines disaggregated evidence to determine whether the peculiar behavior of aggregate prices in the U. S. has been widespread or confined to specific misbehaving sectors as of 1970. If the beginning of the present recession is dated from the peak of industrial production in the third quarter of 1969, four quarters of recession have now passed without any decline in the rate of advance of the nonfarm private deflator (NPD). There is no historical precedent for this, since the rate of increase of the NPD had fallen from 5.9 percent in the last four expansion quarters. Abstracting from the effects of the automobile strike, the near-term prospect for the NPD depends no the interpretation of the recent surge in prices of structures. The price indexes for structured do not measure actual prices but rather a weighted average of wage rates and materials costs. In the price equation, changes in prices relative to wages are explained by the growth of unit labor cost relative to standard unit labor cost and by changes in the total employment rate of manhours and in the ratio of new orders of durables to shipments. If the rate of change of wages is no faster in 1971 than in 1970, and if the productivity rebound continues at anything like its present pace, a slackening in inflation in 1971 is very likely if statistical relationships fitted to earlier periods of the postwar economy have any validity at all.