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In small doses, inflation can be an economic tonic, stimulating consumers to spend and businessmen to invest. Historians sometimes define the Dark Ages as 600 years of falling prices. The trick is to limit the price rises to about 2% a year or less, as was the case from 1960 through 1965. Over the last twelve months, however, consumer prices have jumped 4.3%, the greatest annual gain since the Korean War year of 1951. During October, the latest month for which statistics have been compiled, consumer prices rose at a frantic 7.2% annual rate. While the nation's output of goods and services climbed 8.7% to a record of $860 billion for the year, almost half of that was accounted for by price increases. Just over half represented "real growth."
Everybody felt the pangs of inflation. The effects showed up in the form of $2-an-hour baby sitters, $3 men's haircuts and $72-a-day hospital rooms. Housewives complained about $1.99-a-lb. sirloin, and the President-elect of the U.S. yearned to find a good 50¢ hamburger. Price increases were so pervasive that not a single component of the Government's price index declined. Transportation rose 4.2%, food 4.5%, apparel 6.6%, medical care 7.2%. By Washington's official reckoning, which probably understates the cost of living in many large cities, it now takes $122 to buy goods and services that a decade ago cost $100.
Deeper down, inflation caused some dangerous distortions in the U.S. economy. Consumers and businessmen rushed to borrow, spend and invest, hustling to convert their cash into goods or services before the value of the dol lar declined still further. All this only stoked inflation, and led to an abnormally steep demand that may cause an abrupt contraction on some less lucky tomorrow. As usual, some of the worst victims of inflation were the poor, who had to pay more for everything and lacked either the resources or the sophistication to invest in property or paper with a rising value to offset price increases. Clearly, one of Richard Nixon's first priorities must be to slow the inflation without starting a recession, whose first victims would also be Amer ica's poor. Economist Arthur Burns, one of Nixon's most influential advisers, warns: "If inflation continues, an economic bust may become unavoidable."
The Surge in Wages
The seeds of today's trouble were sown three years ago. In 1965, Lyndon Johnson decided that the nation could simultaneously support the Viet Nam buildup and the Great Society. Critics insisted that such policies would push up prices unless taxes were raised. Johnson refused to propose higher taxes. Such a move would almost certainly have prompted Congress to cut back some of his favorite spending programs. Later, faced with soaring federal deficits, Johnson changed his mind and urged a tax increase. But Congress dallied for 18 months—and thus lost an opportunity to halt inflation before it took deep root.