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September-October 1967
WYO.
NEBR.
Educational Expenditures
in the United States
. page 3
The Impact of Farm Prices
on Wholesale and Retail Price Levels • • page 9
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E ucational Expen
In the Unite
1
ures
Sates
Ry Ri ·hard F . Young
NOWL EDGE CA N
be sought for its own ake
Ka nd looked upon as an end in itself. In thi s
respect, education enriches and add s mea ning
to our lives. Y et, many pursue an education
with an eye toward enhancing their productive
and earning potential. Education engaged in
for the latter reasons increases one's alternatives
and ca n be regarded as an investment. The
purpose of thi s artic1 e is to consider th e volum e
of education al expenditures in th e United
States- their level, their growth , and so me of
the rea o ns for which they are underta ken.
The noti on th at men invest in them elve is
not new. Benj a min Franklin o nce remarked
that " an investment in knowl edge pays the best
interest. " The noted 18th century British philosopher-economist, Adam Smith, included all
of the acquired and useful abilities of all of the
inhabitants of a country as a part of capital.
Thi s approach necessitates a broad concept of
capital and, whil e several prominent economists
have ac knowl edged th e validity of the hum an
capital thes is, the main stream of eco nomic
thought accept a more narrowly defined view
of both investm ent and the stock of capital.
The post-World War II period has provided
a context favorable to the revival of interest in
investments in education. Studies and developMonthly Review
•
Seplernber -Octob .r 1967
ment in the Uni ted tate , Wes tern E urop ,
and th e underdeveloped co untrie have focu sed
attenti o n on th e role of hum an resources in
the process of economic growth. Edward F.
Denison and Theodore W . Schultz have attributed much of the income growth in the United
States to increases in th e qu ality of the hum an
input. Schultz es tim ates th at between 1889 and
1919 the rate of increase in labor and capital
co mbin ed was only 67 per cent as large as that
of inco me. Even mo re striking is his finding
th at between 19 19 and 1957 increa e in manhours worked and tangible capital accounted
for only 32 pe r cent of th e growth in income.
Schultz beli eves th at th e size of this residu al
implies th a t a substantial part of thi s growth
ca n be accounted for by examining improvements in the factors of production . This, in
turn , generates an interest in education as a
means of improving the labor input. D enison
attributes to education about 23 per cent of
the growt h of real nation al income in the
N ation from 1929 t 1957. 1
1
Theod ore W. Schultz, "Jn ve tment in M an: An Economist's Vi ew," Th e Social Sen ·ice R el'iew (June 1959) ,
pp. 114-11 5; and Edward F . Deniso n, "Education, Economic Growth, and G a ps in Inform ation," The Journal
of Political Eco nomy (Supplement) (October 1962), pp.
124- 128 .
3
Further, the amazing postwar recovery of
Western Europe is evidence that, where the
labor force is educated and trained , the injection of physical capital may well provide the
mi ss ing link needed to accelera te eco nomic
growth. Much of the growth of variou European economies has been ex plained in term s
of the stock of, a nd investment in , human
knowledge and abi lities. On the other hc:nd,
the di sa ppointing performance of the unde rdeveloped countries sugges ts th a t additions to
th e stock of physical capital bring less than
sa ti sfactory results when sufficie nt qu antiti es of
trnined and cducat d pe rsons do not ex i t.
This probl e m ha s been co mpo und d f urth cr
by th relu ctance of many poore r nation s to
accept aid in th e fo rm o f nwn i.t 1 erial and tc hnical ta l nt , pr fc rring to ma n what industry
they have with the ir own peo ple.
Educational expi.!nditurcs arc considerable
a nd are made partl y to increase productive
capabilities . The forego ing sugge ts the array
of evide nce that can be marshaled to support
th e view th at at least a part of outlays for
education mu st be considered an investment
th at contributes heavil y to real income growth .
Historically, th e financing of education has
been largely a state, local, and individual
problem. However, Federal assistance for educati o n da tes back to 1785 and the beginning of
allocat ion of public land s in support of schools .
The path of rising Federal educational expenditures ha been marked by such milestones as
the Morril Act of 1862, which authorized
gra nts o f land or scrip for th e establi hment of
land-gra nt coll eges, a nd the Smith-Hughes Act
of 1917 a nd the George-Barden Act of l 946,
both of whi ch provided upport for voca tional
and tec hni ca l educa tion . I11 ad lition , F d ml
a id to ed ucatio n ha s in ·Jud d suc h a tiviti s as
estab li sh me nt of vet rans' ducational b ncfits,
Nati na l Defe nse ducation Act, and Federal
constructio n a nd opera ting a ista nce for
school s in districts affected by F ederal activities.
F ederal admi nistrative budget expenditures
for education tripled during the period 1961 to
1966 (Table 1). Estimated expenditures for
1967 and 1968 indicate an exte nsion of this
trend . The accou nting conve nti o n according to
Table 1
(Fiscal years in millions of dollars)
Actual
1961
Description
1962
1963
Estimate
1964
196S
1966
1967
1968
Elementary and
Secondary Education
332
337
392
404
418
1,368
1,827
2,000
Science Education and
Basic Research
143
183
206
310
309
368
395
455
Higher Education
286
350
428
383
413
701
451
- 376
Oth er Aid to Education
181
207
219
241
405
397
631
737
943
1,076
1,244
1,339
1,544
2,834
3,304
2,816
81 ,515
87 ,787
92,642
97,684
96,507
106,978
126,729
135,033
Total
Total Administrative
Budget Expenditure s
*Does not include : foreign information a nd exchange activities, veterans' education and training benefits,
school lunch programs, vocational rehabilitation programs, or military training.
SOURCE : " The Budg e t in Bri ef," Executive Offi ce of the President, Bureau of the Budget, January 24, 1967 .
4
Table 2
(Billions of dollars)
Source of Funds
All Levels (Total Public
and Nonpublic)
Federal ..
State ..
Lo ca l .
All Other
Elementary and Secondary
(Tota l Public and Nonpublic)
Federal
Sta te
Local
All Other
In sti tut ions of High er Educa tion
(To ta l Publi c and Nonpublic)
Federal
State
Local
All Other
1955-56
1957-58
1959-60
1961-62
1963-64
1964-65
1965-66
16.8
1.0
21.1
1.4
24.7
29.6
2.4
36.6
3.4
40.0
4.8
6.2
8.5
7.3
9.6
8.9
10.9
12 .9
45.1
5.4
13.3
5.0
6 .0
12.7
0.5
15.8
3.7
7.1
4.8
18.0
0.8
5.7
9.4
7.2
3.8
1.4
4.1
0.5
1.1
0 .1
2.4
0.7
8.4
1.9
5 .::1
0.7
1.4
0 .1
3.1
1.8
2.1
6.7
1.0
1.6
0 .2
3.9
11.2
7 .1
21.1
0.9
6.8
11.0
2 .4
8.5
1.5
2.1
0 .2
4.7
9.4
24.8
1.0
8 .1
12.6
3 .1
11.8
2.4
2.8
0 .3
6 .3
3.8
11.9
14.1
10.2
1966-67
48.8
14.9
6.1
14.7
15.7
11 .5
12.3
26.8
1.0
8.7
13.8
3.3
29.9
2.1
32 .0
13.2
2.8
14.5
2.3
10.7
15.3
3.6
3.7
15.2
3.3
16.8
3.8
3.2
3.6
0.3
6.9
0.4
4.0
0.4
8.6
9.7
7.9
SOURCE : Projections of Educational Statistics to 197S-76, U. S. Department of Health , Education, and Welfare, 1966 .
which loan participation sales are recorded in
the budget as a negative expenditure is responsible for the apparent slower growth in expenditures for education from 1966 to 1967,
and the apparent dec1ine from 1967 to 1968.
For xamplc, in fi sca l 1968 c timated sales of
$1.8 billion of shares in p o l of loa ns for
college hou sing and acad mic faci lities and of
student loans reduce the net admini trativc
budget expenditures for education to $2.8
billion (Table 1), while the extent of such
Federal aid is actually $4 .6 billion. This bookkeeping transaction is reflected in the "Higher
Education" category of Table 1; the pattern
of increasi ng Federal aid to education is clear
in the other clas ifications .
Federal support of education, training, and
related activities goes beyond aid to ed ucation
narrowly defined, as prese nted in Table 1, and
includes such programs as vocationa l education;
work-training and other adult or continuing
education ; training of Federal personnel. both
military and civilian ; and international educa-
tional activities. Total Federal outlays for this
broader functional classification of "Education,
Training, and Related Programs" have increased from $7 .3 billion of actual expenditures
in fiscal 1966, to $10 billion in fiscal 1967
and $ 11 billion in fi scal 1968. (Expenditures
for 1967 and 1968 arc budget estima tes before
participation sales arc n ttcd out.) ~
Federa l outlay rep resent a rather small segment of the total sources of funds available for
educational expe nditure. The reason for discussing them first is twofold. First, they are indicative of a growing level of educational expenditures-in which Federal Government outlays are growing faster than other sources of
funds and therefore rapidly increasing their
relative share- a nd , ccond, data on Federal
outlays arc availab le in a manner th at is
reasonably concise and consistent. P erspective
may now be gained by placing Federal contri2
"Special Analyses-Budget of the United States," Fiscal
Year 1968 (Washington: U . S. Government Printing Office), p. 95.
5
Edu cati o n a l Expe nd itures
Table 3
RELATIVE SHARES OF
ESTIMATED EXPENDITURES BY EDUCATIONAL INSTITUTIONS, BY SOURCE OF FUNDS,
UNITED STATES, 1955-56 TO 1966-67
Source of Funds
1955-56
1957-58
1959-60
1961-62
1963-64
1964-65
1965-66
1966-67
(Per Cent)
All Levels (Total Public
and Nonpublic)
Federal
State
Local
All Other
5.9
28.8
42 .9
22.4
6.6
29.4
40.2
23 .8
7.5
29.5
39.0
24 .0
8.3
30.0
37.3
24.4
9.3
29.8
35.2
25.7
9.5
29.8
35.2
25.5
12.0
29.5
33 .0
25.5
12.5
30.1
32 .2
25.2
Elem en t ary and Seconda ry
(Total Public and Nonpublic)
Federal
State
Local
All Other
3.9
29.7
56.2
10.2
3.9
30.5
53 .5
12. l
4.3
31.4
52.4
11.9
4.2
31.8
51.9
12.l
4.0
32.7
50.8
12 .5
3.7
32.5
51.5
12.3
7.0
32 .5
48 .5
12.0
7.2
33.4
47.8
11.6
Ins titut ions of High r Education
(Total Public and Nonpub lic)
F d e ral
State
Local
All Other
12. l
26 .5
3.0
58.4
13.6
26.9
3.0
56.5
16.0
24.9
2.8
56.3
18.l
24.7
2.6
54.6
20.0
23 .9
2.4
53.7
20.9
23 .9
2.4
52 .8
21.7
23 .9
2.4
52 .0
22.7
23 .5
2.4
51.4
SOURCE : Projections of Educational Statistics to 1975-76, U.
butions in the context of total sources of fund
available to educational institutions.
Federal fund s made avail able to educational
institutions- thou gh la rge, and grow ing-now
( 1966-67) comprise only about one eighth of
a ll such outlay in the Nation (Table 2 ). Whil e
so me r alignm nt ha s tak n place in th . ha re.
underw ritte n, the abs lute am unt of fund s
made ava il a bl e to , and expe nded by, ducational in stitution s ha s changed dram a tically .
Over the period I 955-56 to I 966-67, total
resources tripl ed. Federal dollars made a vailable increased-from a small base- six times ,
state sources three times , local outlays doubled ,
and nonpublic so urces of funds more than
tripl ed their respect ive effort s.
While total . upport for eleme nt a ry a nd
. cco nd ary education was about twice that of
hi ghe r education , th e rate o f grow th in fund s
ava il ab le for ex pe nditure by th e la tte r has been
more rapid . There also arc significa nt differences in fundin g . o urce s. Hi ghe r education
relics quite heav ily o n nonpublic fund and receives rela tively littl e support from local
6
s.
Department
of Health,
Education, and Welfare, 1966 .
governm ents. In the case of elementary and
secondary education , however, precisely the
opposite is true.
Scrutinizing data indicating sources of revenu e available for expend iture by educational
institution s, o ne finds that the Federal hare
ha. more th a n d ublcd over the p riod 1955-56
to 1966-67. h
ha re a sum cd by the tatc ,
de. pit a d clin in th e hare of th e financial
. upport fo r in titutions of hi ghe r educa tion ,
rose by 5 pe r ce nt, the loca l burden declined
by one fourth, and th e amount from non public sources increased by 13 per cent (Table
3) .
Private or individual outlays for education
certainly a re germane to this discus ion , yet a
paucity of con i te nt data reflects the diffi culties involved in attempt ing to quantify such
o utlays. The data fo r n npublic fund s available
to educa tion al in titution (Table 2 and 3 )
shed so me light on thi s subj ect but other, or
nonpublic, ourccs ca nnot be equated with
private, or individu al, expenditure . Many
private education al costs-whether direct or
Chart 1
MEDIAN SCHOOL YEARS COMPLETED
ADULT POPULATION
11 . 8
--
10 . 6
~
-9.3
8.6
~
19 40
1950
1960
'----v----'
'-v---1
+.8%
+1.4%
Average
Annual
1965
'--v---1
+2.3%
Change
SOURCE : Statistical Abstract of the United States, 1966, p . 113.
imputed- a re met without a corresponding
amount received or expended by the educational institution attended.
RESULTS
ea rn in excess of 80 pe r cent more than high
school gradua tes. The refore, while the greatest
income diffe re nti al occurs between persons with
a t least o ne coll ege deg ree and those without
a degree, substa nti al diffe rences in medi an remuneration ex ist be tween all of the levels of
educa tion depicted .
A definite cau se-a nd-effect relationship
betwee n increases in th e level of educ ational
a ttainme nt a nd increases in labor income a nd
producti vity mi ght be difficult to es tablish , but
th e fac t that education and training enhance
o ne's ea rning capa bilities is ha rd to deny. The
bene fit s of educa ti o nal adva nce may be depi cted furth e r by in creases in th e return to
bbo r as ,1 fa c to r o f eco no mi c procl u ti o n. Whi le
a pa rt o f thi s re turn to labo r is cer ta inl y attributabl e to inc reas es in th e qu a ntity a nd qu ality of the o th e r fac to rs- la nd , phys ical cap ital,
and e nte rpri se- a large portio n of inc reases in
agg regate labor inco me mu st be regarded as
the result of in creases no t only in th e qu antity
Chart 2
MEDIAN ANNUAL INCOMES
BY LEVEL OF EDUCATIONAL ATTAINMENT
If ex penditures for educati o n have bee n adva nc in g, so h,1ve th e le vel of educa ti o nal a ttainm nt a nd th e pres um ed benefits. l n 1940,
th e median numbe r of schoo l yea rs completed
by th e adult population was o nly 8.6 . By 1950,
it h ad ri sen to 9 .3; by 1960, it wa s I 0.6; a nd
in 1965 th e median attainment stood at 11.8
yea rs. Not only is the number of years of
academic training increasing, it is increasing
at an accelerating pace (Chart 1) . Assuming
that approximately h alf of the adult population
h as completed high school (Ch a rt I ), calculation s (Chart 2) indica te th at those with eighth
grade edu catio ns ea rn o nly two third s as much
a th ose with hi gh sc hoo l diplom as and th a tta king the median- coll ege gradu ates make
one and o ne half times as much as hi gh chool
gra du a tes. Co mparabl e data indicate th a t those
with g raduate schoo l o r profess ional tra inin g
Monthl y Review
•
September Oclobe,
I 967
8th
Grade
TECHNICAL
NOTE :
March 1965.
SOURCE: Statistical
p . 115.
High
School
Persons
Abst ract
25
of
College
Graduate or
Professional
yea r s
a nd
the
o ld
United
ove r
States ,
as
of
1966,
7
Educational Expenditures in the United States
but also in the quality of labor. The crux of
this matter rests upon the relationship whereby
education enhances one's abilities and ultimately increases incomes as a res ult of increases
in labor productivity ( Chart 3). Increases in
individual remuneration are indica ted by a per
worker index of labor income. Increasing labor
productivity also has been charted, denoting
output per man-hour worked. From 1961
through most of 1964, labor income per worker
and output per man-hour for th e whole economy rose at similar rates. As the economic expansion ga ined momentum in 1965 and 1966,
labor inco mes adva nced more rap idl y th an
l abor productivity.
Chart 3
P
CTIVITY, 1961-66
LABOR I COME
QU
TE LY DATA AT SEASONALLY
ADJUSTED A NUAL RAT S
lndu
160
1961 = 100
150
/
3
Alth ugh only a part of cdu cati n truly
represe nts invc tment while a nother part represents consumption , education purely as an
investment would be economically attractive
and meaningful. Of course, other forms of investment also are necessary for economic development. Attention also should be directed
to the type of education needed to induce
economic growth , if that is, in fact , the motive
behind th e outlay. A technical, professional,
"Labo r in co me, in thi s se nse, is th e su m o f wage an d
ala ry disbur em ents and ot her labor income. Labo r income p er worker i lab r in come divided by th e sum of
agric ultural and nonag ri c ultural wage and sa la ry e mployment. Output pe r m a n-hour is calc ul a ted by dividi ng
constant dollar (19 58) g ross national product by the
number of man-hours worked in the entire economy
for a comparable period .
8
140
Labor Income
~
130
120
~
~tput
Per Man-hour
\
110
100
Labor Income
Per Worker
90
1961
'62
SOURCE : U. S.
Labor Statistics .
'63
Department
'64
of
'65
Commerce
'66
and
Bureau
of
or managerial education that would be looked
upon quite favorably by those consciously pursuin g a return on the ir educational investment
also h uld be beneficial in furth e ring economic growth . The ex tent to which American
have unde rtaken outlays for education is impressive, as i the growth of these outlays and
the results achieved .
The Impact of arm Pices
0 hole ae an
ail r"ce L el
B y Gene L. Swackhamer
GRI UL TURAL output ha s increased a t an
average an nu al rate of about 2. 1 per cent
ince 1950, compared with a n average populatio n increase of 1.7 per cent in that time.
Ove r the sa me period, per cap ita di sposable
inco me has in rca sed 2.4 per ce nt annually in
constan t ( 1958) d li ars. A ricultural exports
have nc.irly doubl d from $3.4 billion in 1950
to $6 .6 billion in co nstant cl li ars in 1966,
for an a nn wll rate o f incr a
of about 4.3
pe r ce nt . The con qu ence of these cha nges
see mingly should be stra ightforward, yet there
arc many interes ting a nd perplexing exceptions.
With rapidly ri in g exports, increas ing per
capita di sposable incomes, and a n a nnu al
population increase nearly sufficient to consum e our annual domestic agricultural production increase, few ag ri cultural price problems
would be expected . Ye t, prices received by
farmers co ntinu to fluctu ate widely .
Strong dom es ti c a nd expo rt de mands of the
pa st few year have reduced excess tocks of
ma ny commodities to le burde nsome levels
a nd , in some cases, to near hortages, thu
stre ngthe ning commodity prices . Livestock
prices , recovering from sha rp increases in
supplies in 1964, increased through 1965 and
I 966. In fac t, the upward movement of agricultural prices in much of 1966 may have
reflected considerabl e speculation based upon
anticipated world food hortages in addition
to the pric inc r a e re ultin g fr om a decliningsupply , stron g-de ma nd inte raction . Following
thi s de duction a step further , to th e 10 per
cent drop in farm prices from September 1966
to April 19 67, mi ght lea d one to conclude th at
mos t of th e price softness of the past w inte r
can be attributed to a counter-reaction from
the harp increases during 1965 and ea rly
1966, o nce the world food dem and issue matured in perspective.
A maj or factor in fa rm price weakness
during th e spring of 19 67 wa the abundance
f suppli es o f some major farm c mm dities
suc h as r ·d mea ts, poultry , a nd c itrus. But,
given th e su pply sit uati on that xis ted b tw e n
cpl mbcr 1966 an d Apri l 1967, th e trength
of export d mands , the continuing high levels
of pe rso nal income, a nd steady population
growth , it see ms unlikely tha t the full downward thru st of farm prices during t he past
winter can be accou nted for totally by the
actual s upply-dema nd considerations that prevailed. Even though th e ch allenge of price
analysis is to accura tely predict th e price impact of supp ly-a nd -de m and changes in a dynami c enviro n ment, o ne cann t overlook the
poss ibility that , in th e m a rket e nvironm ent
ex istin g for most farm commod itie , prices
may overreact- reflecti ng th e influence of
specu lation a nd m a rket imperfections.
One o f th e most common methods of m easuring demand-and-supply price relationships
is th e estimation of price a nd income elasticity
of d emand for goods at the farm and retail
levels. The concept of elasti c ity need not be
confu sing: it is the respons iveness of quantity
to p ri ce o r qu a ntity to income. Ela ticity is
the name give n to th e pe rce ntage change in
quantity as ocia ted with a 1 pe r ce nt change
in price or income. If elastic ity is less than one,
demand is ca ll ed inelastic- m eaning th at, for
a small decrease in the price of a good, the
percentage increase in quantity sold will be
9
lhe lrnpoct of Farm Prices
proportionally les th an th e price percentage
dec rea e. If ela ticity is greater than one, it is
called elastic- mea ning th at, for a small price
decrease, the percentage increase in qu antity
old will exceed th e percentage dec rease in
price.
N um crous tudics of agricultural prices have
revea led th at price and income cla ticity of
demand fo r food s, mca urcd at th e farm Jcvcl,
ge nerall y arc ve ry inelastic- a price increase
o f. 1 per cent may r duce per capita use of
food at th e farm level by about . I per cent ,
or a 1 per cent increase in real income per
capita may lead to a .1 per ce nt increase in
pe r cap ita food use. At th e r tail leve l, price
la sti ity or d mand ,il so is qu it in LL ti cra n in
in 's ti111 ~1 tcs from - .3 to - .-5. '
tudi s of in me and exp nditure data fr m
1950-62 have show n th at income elas ticity of
demand at reta il is somewhat more elas ticwith a 1 per cent increase in personal di sposable income being assoc iated with a .49 per
cent increase in food consumption and a .95
per cent increase in demand fo r marketing
services.
Many studies have confirmed these low elasticity es timate . Work in this area is important,
since it ex pl ain · how a comparatively mall
change in supp ly ca n have a drasti c effect on
farm prices. The last icity of demand at the
farm level is lower th an at th e retail Jcvel
beca use of th e rela ti ve inflexibili ty of di stributors' and middlemen's margin s. Middl emen's
margins tend to remai n rather stable through
periods of high and low agricultural prices
th at result from changes in supplies . On the
other hand, the margin, or spread, between
the price of a good at th e farm and at retail ,
tends to change with changing ge nera l economic co nditio n. . As a r . ul t of seve ral y ars
of eco nomic prosperity, with consum er de1
l
' Geoffrey . S hep herd , ,·-lgric 11 /11mtl Price A 11a/_1·sis ( Ames,
Iowa: l ow:i S ta te
ni ve rs it y Press, 1963), pp . 25-26.
Th e minu .:; s ig n indi ca tes t h at q u a ntit y m oves in verse ly
to pri ce c h a nges .
10
manding more services and the costs of these
services becoming more expensive, the sp read
has continually widened.
In th e past few years, we have witnessed
both a supply-oriented change in agr icultural
prices and a pro perity-oriented change in
marketing margins. Farm prices rose from a
low level for recent yea rs in 1964 to a high
in late 1966 as farm upplies dwindled in the
presence of a trong demand. At the same
time, costs of transporting, processing, packaging, and retailing food increased. The farmto-reta il price spread widened almost unnoti ced, since both farm and retail price were
mov in in the sa me direction . A s farm prices
r trea ted b tw n
I l mb r 1966 and April
1967, middl m n'. mar ins in ·reas d rd atively
beca u e of the rigidity of numerou marketing
charges . As a result, a smaller downward
movement in r tail food price took place.
966 PRICE MOVEMENTS IN RETROSPECT
Price analysis proved to be very hazardous
last year as agricultural and retail food prices
rose more rapidly than was anticipated. Early
in the yea r, average retail food prices were
predi cted to show a yea rly adva nce comparabk to th e 2. 3 I er cent ri se in l 965. Since
th e first quarter of 1966 was xpected to show
an increase over th e fourth qu arter of l 965which was 3.5 per cent above a year earlieroffsetting declines were xpected for the last
half of. 1966. Supply increases that would
bring declines in food prices and moderate
th e rise of the total wholesale and consumer
price indexes were anticipated.
Much of the rapid advance of the Consum er Price Index (CPI) throu gh the winter
month ( 1965-66) was attributed to the steep
ri e in food price . By th e end of the first
quarter of 1966, howeve r, declines in the
gra in , livestock , and poultry components of
th e Whol esa le Price Index (WPI) were credited with reve rsing th e upward trend of the
farm products index. Price analysts, who be-
on Wholesale and Retail Price Levels
li eved that the rise in food prices owed much
more to curta ilment o f suppli es th a n to expansion of dem a nd s and increasi ng m arketing
cost , a nticipa ted lowe r re tail food costs as a
result of lower farm product prices. They saw
increa ing production of beef, poultry, and of
so me crop food s- and with greate r fall pork
output aJ o expected- a
vidence of supply
expa n ion . On th de mand ide, however, the re
remained considerable tre ngth from increa ing
di sposa bl e incomes a nd from heavy milita ry
procurement. Thi s stron g de mand , bolstered
by a trong tendency towa rd increasing m a rketing co ts, minimi zed th e dow nw a rd tre nd in
retail food prices.
By May , fir st- quart ' r food pri c ·s wc r • ()
pe r
nt abov th first qu ar t r ( 1965 and
2 .5 p r ce nt abov th fourth quarter of 1965.
T he farm -re tail marke ting spread was ex pected
to widen only li ghtl y. Little price decline
wa a nticipated at r tail until summer because
reta il price ch a nges tend to lag behind tho e
a t wholesale a nd beca u e of underlying easonal strength in ea r; y summe r retail prices .
By Augu st l 966 , retail food p rices were
5 per cent above the year before and secondqu a rte r prices we re 1 pe r cent above th e fir t
quarter , de pite a small decline in average
pric
r ceived by farm rs a nd in who le ale
fo d price . Th Un it d tates D epartm ent
of A gr icultu re (USDA ), in Au gu t, b eli eved
th a t retail food pric s probably had reached
a seasonal high in Jul y- they expected a 1-2
per cent decline from the peak, with retail
food prices for the year averaging around 4
pe r cent above 1965.
By September, th e WPl had ri sen 3 .75 per
ce nt over the previous 12 month s. Prices of
food tuff had increa d 8 pe r cent but, b ec·rn
th e ir importa nce in the index is o nl y
a fo urth , th y acco unted f r but half of the
ri e in th e total index. The C PI had ri en more
th a n 3.5 pe r cent from a year ea rli er.
In Novembe r. the SDA repo rted that th e
unu sual price ri se th at deve loped in 1966 cou ld
Monthlv Review
e
Table 1
BUREAU OF LABOR STATISTICS AND FEDERAL
RESERVE GROUPINGS OF WHOLESALE PRICES
Percentage Change in Annual Rates
Successive Six -Month Periods
Oct. 1965
to
Apr . 1966
Ap r. 1966
to
Oct. 1966
Oct . 1966
to
Ap r. 1967
4.7
1.3
- 1.7
9.8
14 .l
.2
- 3.8
- 9.9
- 13 .0
6.9
2.9
3.3
1.9
- 7 .5
1.3
Indus tri a l Co mmoditi s
2.7
To ta l Mat ria ls
3.5
Tot ed Produ cts
1.7
9.7
Foo d s a nd Feeds tuff s
Liv es to ck a nd Produ cts 12 .3
Crops and Product s
6.7
1.4
.2
2.9
2.0
.2
4.1
1.0
.6
1.9
10 .l
- 16 .2
- 2.9
All Items
BLS Price Groups
Farm Product s and
Proce sse d Food s a nd
Fee ds
Farm Products
Processed Foods and
Fee ds
Industr ia l Commodi ti es
FR Pri ce Groups
be traced partly to reduced supplies of some
important foo ds, but mostly was due to the
strong adva nce of demand for food products.
The 1966 price ri e of 5 per cent was twice
th at of 1965 a nd the largest annual increase
since an 11 per ce nt jump in 1951. The USDA ,
in Nove mber 1966, foreca st high ave rage retail
food prices for 1967- du e to a str ng eco no my
a nd in crea ing dcfe n
requirements- but did
no t exp ec t th e inc rea e to ap proac h the 5 per
ce nt ri se o f 1966 .
Where the Change Occurred
A more deta iled exa mination of wholesale
and consume r prices shows where major
cha nges occurred. T abl e I gives percentage
changes in a nnu al rates for successive sixmonth perio ds of th e WPI a re ported by the
Bur a u f Labor ta t1 tic ( BLS ) a nd for
pecia l Federa l Res rve (F R ) gro upings of
WP( compo ne nt .
The we ighted co ntributio n of farm prod uct
a nd proce scd food s to the 4 .7 pe r cent a nnu al
rate of increa e in th e WPI ( between Octobe r
1965 and April 1966) was a pproxim ately 2.5
11
The Impact of Form Prices
percentage point , or a little more th a n 50 p e r
ce nt of the ri s . The re ma ining portion of the
increa e-2 .2 percentage points-came from
all other commodities . In the more detail d
ubdivi ion of F R groupings, it can be seen
th a t th pe rcentage inc rea e of 9 .7 fo r all ag ricultu ral fo ods a nd feedstuffs was influenced
trongly by a 12. 3 per cent a nnu al ra te of inc rea e for li v toc k a nd live tock products.
Pric in c reases fo r to tal indu tri al ma te ri als
exceeded tho e fo r to tal indu tri al p roducts.
ln th e period fro m A pril to Octobe r 1966,
th e annu al ra te of increase fo r all ite m slow d
to 1 .3 per ce nt , re fl ec tin g a reversal in the
d ircc ti n of fa rm pr du ct pri e a nd a
ca nt cl 'cline in th a nnu al rat
f in r a.
p ro sscd fr ods a nd othe r
mm dit i ' S.
what urp ri sin ly, a ll f th e R gro up ing
ag ri ul tural c mm o diti s howed a po itiv
a nnu al ra te of in c rea e, though a t a much
slower ra te. Thi i du to th e d i t ributio n of
prod uc t prices to the respecti ve livestock a nd
crop fa rm price groups which te nded to offset
the fa rm price declines . The switch in ra tes of
increa e fo r industrial p roduct and m ateri al
prices was also noticeable.
From O c tobe r 1966 to A pril 1967, fa rmprod uc t pric
co ntinu d t d cline, a did
proc . cd-f d pr ic s. T h ir w ight in th e
index wa suffi ci nt t
ff t a 1.3 per cent
a nnu al ra t
f increa e fo r a ll o ther co mmod itie · prod ucing a - I .7 p r ce nt a nnu al
ra t of cha nge in th e all -item index . Wi thin
F R gro upings, li ves toc k and lives toc k products
co nt ributed substa ntially to the decline in
prices for all agricultural commodities.
Within the CPI, cha nge in fo od prices also
influenced th e to tal index, but th e m agnitude
o f cha nge wa le e ned by th e rigidity a nd
u~wa rd bi-1
f ma rk ting c ha rg pecially
with th e gr win g dema nd fo r additio na l foo d
e rvices. Betwee n Oc to ber 1965 a nd April
1966, th e Pl ro e a t a n a nnu al ra te of 3. 8
pe r ce nt (Ta bl e 2), co ntras ted to its more
modera te avernge a nnu a l ra te o f in c rea e of 1.2
12
Table 2
CONSUMER PRICES
Percentage Change in Annual Rates
Successive Six-Month Periods
Oct. 1965
to
Apr. 1966
Apr . 1966
to
Oct. 1966
Oct. 1966
to
Apr . 1967
3 .8
3 .6
1.4
Tota l Food
Food a t Ho me
Food Awa y fr om Hom e
7 .8
9.1
4 .0
2.8
2 .0
5 .9
- 3.3
- 5.4
5.0
Com modit ies Le ss Food
Tota l No ndu ra bl es
Tota I Du rab les
1.3
1.9
.4
3 .0
3 .5
2.7
2.4
-.2
Tota l Servi ces
4 .0
4.6
4.0
All
Ite m s
1.5
per ce nt be twe n 19 58 a nd 1964 (Ch art 1 ).
In th ' 0 lob r 1965 t A pril 196 p ri ocl ,
tot~il food a· ·o unl d fo r n a rl y half f th e
in ·r as' , sc rvi · s ac unl d f r ab ut 40 p r
ce nt , a nd ot h r c mm o Ii ti c f r IO p r ct.: nt.
During thi s ·a me pe ri o d, price inc reases fo r
foo d a t ho me represe nted nea rl y 90 p r ce nt
o f th e total foo d-index increas .
Although the annu al rate of increase for the
total CPI remained at 3 .6 per cent from April
to October 1966, the rate for food slowed to
2.8 per cent, with the food-at-home component
inc rea ing at a 2 pe r cent annual rate. In
cont ra t to th e fo o d-a t-home index food away
fro m ho me, co mm oditi es les food , and total
scrvi c all inc reased a t a fa te r rate th a n th e
pr ceding ix-m nth p e riod. Although th rev r al o f fa rm produ c t prices wa suffici e nt
to da mpen the WPI increa e to a 1.3 p e r cent
a nnu al ra te durin g thi s six-month period , the
tra nsference to retail prices was slower and
considerably less pronounced.
F rom O ctober 1966 to April 1967, th e foodprice co mponent of the CPI d eclined at a 3.3 ·
pe r cent annu al rate . The food-at-hom e compo n nt d dined a t a 5.4 pe r ce nt a nnu al rate,
whe r a th e fo d-away-fro m-hom part ro e at
a 5 .0 pe r cent a nnu al rate. Commoditie le s
foo d price ea ed to a 1 .5 pe r cent a nnu al r ate
f inc rea e, whil e to tal services re mained at
abo ut a 4 .0 pe r cent rate. The net effect of
th se c ha nges was to slow the rate of increase
on Wholesale and Retail Price Levels
Chart
MAJOR PRICE INDEX S
lndea
Index
120
120
II 5
115
Implicit Prict Index
(1958•100)
/
~
_.
II 0
110
/ .
Consumer Prices
105
105
(1957 - 59•100)
100
100
Wholuole Pricts
(1957-59•100)
95
95
90
1960
'61
90
'62
'63
'64
'65
'66
'67
* For a d e tailed discussion of th e Implicit Price Index, refer
to " A look at Som e Meas ures of Inflation ," Monthly Review,
F dc ral R s rv e Ban k of Kansas City, March -April 1967.
t)f th e t tal CPI to a 1.4 I er c nt annua l rate.
A lth o ugh th e farm valu
f food n )mati ng
o n U . S. farm s declined 5 p r cent be tween th e
third and fourth quarters of 1966, the farmretail marketing spread rose 3 per cent. The
expected decline in reta il food prices developed
slowly in late 1966, and the hoped for moderation in the ri se of the CPI was equally slow in
materializing. The total CPI index continued
to edge upward as the total food index graduall y declined on the strength of declin es in
prices of food at hom e.
SOME OBSERVATIONS ON FARM AND
FOOD PRICES
Chart l shows that th e WPI remained nearly
stable b etwee n 1958 and 1964, while the CPI
rose at a teady annual rate of 1.2 per cent.
With the rapid advance of farm prices through
1965 and early 1966, the WPI rose over
the two-year period at an average annual rate
of 2.3 per cent, and the CPI re ponded with
a 2 .7 per cent av rage annu al increase. R ega rd!
of which index might be used as a
meas ure of price inflation , both showed a conidera bly fast r advance tJ-: an in prior years.
After a review of pr ic analy is litera ture covering recent year , severa l observation
eem
notewor thy . First, th e tran sition of declining
farm prices into lower retail prices normally
Monthly Re iew
•
September-October 1967
occurs with a lag. Second, the size of price
declines from th e farm level through the various stages of processing and on to retail becomes con siderably dampened because of the
fixity a nd rela ti ve importance of marketing
charges.
Chart 2 compares the two principal subgroup of the CPI food index with the WPI
farm-products index. Movements in the total
food index closely corre pond to those of the
food-at-home index. The two indexes are separated b y a nea rly con tant proportion which
repre ent st ad il y ri ing food-away-from-home
price - the behavior o f which is trongly influ need by th co t of s rvi ccs. ince the pric
pc;1k s in th e fall of 1966 , hart 2 illu strat s
cl a rl y th e df ts o f addin r pro r ss iv ly m r
mark tin g c harges a nd s rvi cc ·. From ct b r
1966 to April 1967, a th e farm product pa rt
of th e WP[ declined at a - 13.0 pe r cent annu al rate (Tab le 1), CPI food-at-home prices
declined at a - 5.4 per cent rate, total food at
-3 .3 per cent, and food-away-from-hom e
prices rose at a 5.0 per cent rate (Table 2).
Although Chart 2 dramatically points out
the effect of rigidity and upward bias in marketing charge a nd services, a n important foodprice mca urc- WPI proces cd food - wa
o mitted. In ha rt 3, the movement of food-athom prices a rc co ntrasted to those fo r pr Chart 2
THE CONSUMER 000 PRICE INDEX,
ITS MAJOR SUBGROUPS, AND THE
WHOLESALE AR
PRODUCTS PRIC INDEX
Index
lndu
1957 · 59 • 100
130
130
Food Away From Home
120
( 4 . 54)
120
\
Food (CPI)
\
110
(22 .43)
'
food At Home
100
(17 . 89)
90
100
Fcirm Products
(10 . 64)
90
{WPI)
80
80
1960
'62
'64
'66
'68
13
The Impact of Farm Prices
Chart 3
MAJOR FARM AND FOOD PRICE INDEXES
Index
1957 - 59• 100
In dex
130
130
Foo d
120
Away F rom Home
( 4 .5 4 )
12 0
"'
In the most recent weight revision, the relative
share of food away from home (a $22 billion
industry) increased from 18 to 20 per cent
of the total food index, while the total food
index declined from 28 to 22.4 per cent of
the total CPI.
Food At Home
II 0
100
( 17 . 89) " '
~
I -,
./
""',- ,~,.
I
Far m Products
90
"'
I
(10 . 6 4 )
11 0
: J"'·\
100
P r ocesse d
Food s ¢ Fe eds
(WPI)
( 16 . 53 )
'64
'66
90
80
80
1960
'62
'68
ccs ·cd foods. Al thou )h th ese two indexc · come
cl os to mea uring food prices at a imil ar point
in th e mark tin 1 process, it wo uld b mi l ading t us th e pr c s d-f ods index to pr diet
chang
in the food-at-home index. Between
late 1962 and ea rly 1965, while farm-product
prices declined irregularly, processed-food
prices remained irregularly stable and CPI
food-at-home prices rose. The WPI processedfoods-price index exceeded the CPI food-athome-price index throughout much of 1966,
but declined at a faster rate than the food-athome index as farm prices declined. Processedfood price continued to decline into 1967, but
appa r ntly e tab li hcd a floor o[ re ista ncc during th e spring quarter and aga in how signs
of irregular tab ility at a hi gher plateau. Again ,
we re it not for the widening of the m a rketing
spread, these prices mi ght have come closer
to matching the decline of farm products prices.
A goodness-of-fit evaluation of these indexes,
however, in addition to comparing unlikes,
ignores the more important policy questions
concerning the impact of increases in the total
CPI on wage contracts, through cost-of-living
escala tor clau e . R lief in th e ra te of increase
of the total CPI, as a re ult of farm product
price declines, should be anticipated with caution . Not only do increasing marketing charges
contribute to retail food price rigidity, but
food-aw ay-from-home prices are relatively
more important in the food index than b efore.
14
The long-term movement of agricultural
prices is shown in Cha rt 4 . The top portion
of this chart relates farm product wholesale
pric s to nonfarm products (industrials) on
a 1910-14 = 100 base. Farm product prices
have tended to 1 ad industr ial price in economic upswin s and pr cede th em down in
recessio ns; however, th e pos t-World Wa r If
suppl y buildup in ·1 rricu lture I d to ::i Jo n
de line in farm price that was contrary to th
hi storical r lat i nship . In the past few yea r ,
as urplu e have been con urned , agricultural
prices have returned to higher levels. Important
factors causing farm supplies to increase in the
post-World War II period were Federal commodity support programs that stimulated production , the adoption of output-expanding
technologies , and the development and growth
of export m arke ts and trade progra ms in addition to a tcadily expa nding dom e tic d mand .
Chart 5 focu sc on th e 1960' , u ing an
expa nded sca le and month ly data. The wide
vo lat ility of agricultural prices contrasts vividly
to the stability of nonfarm prices.
Chart 4
LONG-RUN AGRICULTURAL PRICES
Index
19 10- 14 • 100
In d ex
350
350
300
300
Farm Products
250
~
A
I\
fV
'--"--- _J
200
250
200
"'-----Nonfarm
Products
150
150
100
100
50
50
0
0
Ratio of Form to Nontarm Prices
150
150
100
50
o
1900
50
l
'10
'20
' 30
'40
l
'50
I
'60
0
'70
on Wholesale and Retail Price Levels
Within the C Pl's food index and the WPl's
farm-products index ca n be found the unde rlying causes for th e rap id advance of these
two price indexes during th e p ast two years.
C hart 6 shows th e m ajor commodity grouping
with in the food index . Of striking contrast are
the seaso nal patterns of th e fruit and vegetab]es
a nd o th er food indexes to the more stable
ce rea l index . ulmin a tin g a fter rnid- 1966 were
th e hi gh points of each of th e major subgroups
- exce pt meat, w hi ch h ad pea ked earli e r in the
year. These peaks occurred fo ur to six month s
late r than many price a nalysts had predicted.
C urre ntl y, th e meat index has o nce aga in begun
to c lim b, while th ccrc,1 ls a nd dairy index s
r ·111 ,1in n ·,1rly stable.
T h s ub lassi fi cations of th · L1rm -products
incl 'X f th WPl .-.ire show n in harts 7 and 8.
The far m-products index rep resents 10.2 per
ce nt of the to tal WPT , processed foods acco un t
fo r 14.0 per cent, and all commodities-oth er
th a n food- account for the remainder. As
ca n b e seen in Chart 7, much of the seasonal
fluctu ation is offsetting and dampens the impact of the wide price swings of milk, eggs,
a nd fruit and vegetables. Grains and ]ivestock
a nd poultry carry the grea tes t relative weight
in th e farm -products index a nd a re show n in
ha rt 8. From rev iew of these cha rts, it beco mes obv ious that Jive tock a nd pou ltry , milk,
a nd eggs contributed mo t to the 1965-66 ri se
in th e farm product component of the WPT.
Chart 6
0
300
130
130
( 13 .~ )
Fru it ~ Vegetables
120
11 0
\
~
~
~202~~3)
(10 .91
Cereal s
120
I\ ,
/
r
/
100
100 '(....
\,
✓
\
90
90
Other
( 17 .8)
I.
80
1960
'6 4
' 62
80
' 68
'66
E;ir li c r in thi s a rti ll:, fa rm and rood price
move ments were traced throu gh 1966. T hi s
secti o n will co ntrast 1967 deve lopme nts to
those of th e past year. Conclu sions will be
drawn as to the probable c hanges in the far mproducts and processed-foods components of
the WPI a nd of the food components of the
C PI.
In the second q uarter of 1967, a turnaround
in both farm and food prices b eca me appa rent.
This change res ulted from th e influence of
trong dom es tic demand, adverse weather o n
frui t a nd
vegetable sup pli es, co ntinued
stre ngth in re tail dairy pr ices throu gh peak
·ea ona l productio n as the annu al rate of outChart 7
WHOLESALE
RM PRODUCTS-PRICE
INDEX C MPONENTS-PART I
1910-14•100
r
In dex
195 7 -59• 100
Ind e x
Chart 5
FARM-NONFARM PRICES
Index
U
l ndex
3 00
28 0
280
1957-59•100
I nd••·; . . . . - - ~
____
Index
140
140
(11 . 2)
260
260
Nontarm Products
1
2 4-0
124-0
220
j 220
Farm Products
200
Fruit
t Ve9etable
120
120
100
100
80
80
200
100
Ratio of Farm to Nonfarm Prices
90
l 80
uL,1,,l,1
1
,1.,L1uli1L
'62
Mont hly Review
, L1J,
'64
•
L
ltl..1,,11,J,.tL ,j 70
'6 6
'68
September-October 1967
60
iliilutuluI11l iluluLiLiluL,W.ul,JJ1!.ul.u1.JuL..l.wu.l.11WuJ,J.ul.uk
1960
'62
' 64
'66
60
'68
15
The Impact of Farm Prices on Wholesale and Retail Price Levels
Chart 8
WHOLESALE FARM-PRODUCTS-PRICE
INDEX COMPONENTS-PART 11
1957-59•100
Index
r
Index
140
'40 I
Livestock (30 .~J
~
Farm Products /
120 I
t
100 1 ~/"'°\..
y
1~..,
••
~~
y-:..,.,,
~
120
· A'
\ J · \f"i
~
~
(
,'
.'
~
/'
.
I' '/ \
',
Groins
80
(16 . 3)
Fibers(7.6)
,,I
60
1960
'62
'
'64
I.
.I
'66
I
I
1 60
'68
rut r 'main d near Lh e low o f thi s de ade , a nd
a slro n r s aso rrnl upsurg 111 m al-anim al
pri s. At th
am tim
xport a nd military
demands remain ed good.
In July , th e WPl rose to a new high for the
year to date as a result of the sharp recovery in
far m-products and processed-foods prices in
M ay and June, while the industrial commodities index remained stable. Even if prices of
industri al commodities remain at their current
levels throughout the second half of 1967 the
all-commodities index likely will exceed its
year-ago pea k a a re ult of further increases
in farm prices.
At midyea r, the cereals ind x of the CPI
was nea r its 1966 peak lev I. D airy product
prices howed less sea onal weak ne s th an
norm al during th e first six months and were
littl e more than an index point below their
1966 high-even with demand weakness. Meat
prices have reversed a decline and, al though
they are not likely to exceed their 1966 high,
they probably will remain above the lows of
the second quarter. The upward movement of
fruit and vegetable pric s added furth er pre ure to th e food-price index, as they ro e to
th eir hi gh t level ince mid- 1965.
In a n attempt to more accu rately foreca t
future levels of the CPI food index, M atth ews
of the USDA developed an econom etric model
using four b a ic variables: prices received by
16
farmers for all crop foods , prices received for
all lives tock food products, per capita supplies
of mea t, and per capita di sposable income. 2
Using quarterly data over the period 1954-65
and te ting alte rn at ive lags, his model produced
a rea o nabl y good fit of forecast levels to
ac tu al data . By es timating future meat supplies
and farm-price levels, the model forecast an
av rage retail-food index of 114.8 for the third
quarter and 115.4 for the fourth quarter of
19 67. In the fir t two quarter of 1967, the
model understated actu al C PI food prices by
one-half index point. It see ms likely th at the
third- a nd fourth -quarter model estimate m ay
und r tate actual av rage retail f od prices
by n arly a full index p int .
If t Lal s rvic s o nlinu e to adva nc at about
a 4.0 p r c nt an nu al rat and c mm diti es
le food at 1.5 per cent b twee n April and
October 1967-as in the previous six-month
period-wi th food prices increasing as forecast
above ( a l .7 per cen t annu al rate), the annu al
ra te of increase in the total CPI would be
close to 3 per cent. This is a rate of increase
more than double that of th e previous sixmonth period . A faster rate of increa e for
serv ices or co mm oditi es- other th an foodsor f r food , wo uld ca u e the a nnu al rate
of inc rea e for the tota l ind x to exceed 3
pe r ce nt. Al ready the WPI indu tri al commod itie ind x ha ri se n above its Jong stable
level of 106.0. The WPJ farm-products index
shows substanti al seaso nal weakness but
mostly in feed grai ns where the retail price
impact is Jagged through future meat production and in some food grains, such as wheat,
where the raw commodity accounts for but a
small fraction of the fini shed good . In view of
the e development and the nature of m arketing co ts, an annu al increa e of 2 per cent or
mo re in reta il food prices wou ld not be
surprising.
2
J._ L. Matthews, "Forecasting the Quarterly Retai l Food
Pn ce Ind ex," National Food Situation (U . S. Dep a rtm en t
o f Agri c ulture , M ay 1967), pp. 33-37.
@FedFRASER