ECONOMIC

mated smooth trend from a period in which the unemployment rate wasabout 4 percent. A recent calculation by the Bureau of Labor Statistics,(Monthly Labor Review, December 1973) using these elements, leads us tothe estimate that potential was growing by 4 percent per annum after 1969if we assume that output was at potential in the second quarter of 1969. Onthis basis, actual output was about 2 percent below potential in 1973. Whatthe experience of 1973 suggests, however, is that potential does not growyear by year at a constant rate. It is a simplification to assume that the laborforce, hours of work, the stock of capital, the availability of supplies fromabroad, and other determinants of potential move smoothly and continuously.Reliance on a reasonable simplification of this kind is inevitable for inferringthe level of potential for those future years about which we have as yet nodetailed evidence. But for the years that are past, and probably also for aperiod immediately ahead, we know more and should be able to do betterthan read the level of potential off the smooth trend. Looking at it in thisway, it seems reasonable to say that the conditions peculiar to 1973 held"actual potential" below the trend, without at the same time saying that inthe future the actual potential will always be below the trend derived frompast data.THE BEHAVIOR OF PRICESDuring 1973 prices rose more rapidly than at any time since the Koreanwar. From December 1972 to December 1973 the consumer price index(CPI) rose 9 percent and the wholesale price index 18 percent. The comprehensiveGNP deflator rose 7 percent from the fourth quarter of 1972 to thefourth quarter of 1973. Its 8 percent annual rate of increase in the fourthquarter of last year was far above the rise projected by the Administrationa year ago.There is no simple explanation for this price behavior which was themost extraordinary in almost a generation and which confounded theCouncil and most other economists alike. The simultaneous upsurge indemand in the United States and in foreign countries, the shortfall in agriculturalproduction of 1972 and early 1973, the decline in the internationalexchange value of the dollar, the unexpected capacity problems inmaterials industries, the increases in petroleum prices late in the year as aresult of the Arab oil embargo, the shifting character of domestic price controls—allof these tell part of the story of last year's inflation. Chapter 3 dealswith the Economic Stabilization Program and Chapter 4 with the problemsof energy and agriculture. The present section touches briefly on some ofthe broad measures of prices and wages, chiefly in the context of the nationalincome accounts.Price behavior in the private sector of the economy, as measured by thedeflator for private GNP, shows the same broad pattern as the overall GNP65