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June, 1988, Vol. 111, No. 6

Domestic price rise during 1987
reflects swing of energy prices

Craig Howell, Andrew Clem and Robert A. Kuemmerling

U.S. inflation in 1987 accelerated from its lowest level in more than 20 years, largely reflecting the partial rebound in energy prices. The Consumer Price Index (CPI) rose 4.4 percent during the 12-month period ended in December. This compared with an energy-restrained 1.1-percent rise in 1986 and increases of about 4 percent in each of the preceding 4 years. The turnaround in energy prices—particularly in the first half of the year—was almost entirely responsible for the acceleration in the overall index in 1987. Excluding energy, the CPI increased 4.1 percent during the year, after advancing 3.8 percent in 1986.

In 1987, the food component rose somewhat less than in 1986, despite the sharp increase in fruit and vegetable prices. The indexes for shelter and all items excluding food, shelter, and energy each rose slightly more than in 1986. The other commodities component, in part reflecting the declining value of the dollar in international markets, accelerated in 1987. Prices for clothing, wine, and entertainment commodities were sharply higher. Charges for other services, however, slowed in 1987, particularly those for medical care and transportation services. (See table 1.)

Producer prices turned up across a broad front during 1987. The Finished Goods Price Index increased 2.1 percent from December 1986 to December 1987, following a 2.3-percent declining in 1986 and a 1.8-percent increase in 1985. The index level in December 1987 was almost the same as it had been in December 1985. Prices for intermediate goods moved up 5.5 percent over the year, in the wake of a 4.4-percent drop in 1986 and a nominal declining 1985. In contrast to substantial decreases in 1986 (8.9 percent) and 1985 (5.6 percent), the Crude Goods Price Index climbed 8.8 percent in 1987.

Energy prices, which had spearheaded the 1986 declines, rebounded somewhat in 1987, contributing to the upturn at each stage of processing. Food price index movements were generally moderate. The behavior of price indexes for goods except food and energy was mixed. At the crude material level, prices for sensitive industrial materials surged 22.4 percent. Prices for intermediate industrial materials advanced 5.3 percent after 2 years of virtually no change. Yet prices of finished good other than foods and energy rose only 2.1 percent, even less than in either 1985 or 1986, in large part because of downturn in the motor vehicles price index.

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