ECONOMIC

ate of advance in grocery store food prices in the second half of 1972, andsubstantial increases were in prospect for early 1973. This development wasa major threat to the moderate price behavior that had been achieved, aswas obvious by comparison with nonfood prices in the CPI, which hadslowed to a 3.0 percent annual rate of increase in the last 6 months of1972. Specific mandatory controls were therefore retained on wages andprices in food processing and distribution in Phase III, a number of additionalactions to expand supply were taken, and special committees wereestablished to help coordinate activities that would moderate the increasesin food prices. Prices of raw agricultural products continued to be exemptfrom controls.By the spring it was clear that three specific assumptions underlyingforecasts for 1973 had gone awry. In the first quarter of 1973, retail foodprices, propelled by sharply higher farm prices, were already 8.1 percentabove the first quarter of 1972, substantially higher than the average 3 percentincrease for the first half of 1973 over the first half of 1972 that hadbeen forecast by the Department of Agriculture in October 1972. Theofficial year-over-year forecast had been revised by February to 6 percent;by May an earlier expectation that food prices would level off after midyearbegan to appear less certain.The second assumption concerned economic expansion in early 1973 bothin the United States and abroad, which turned out to be much more robustthan had been anticipated. In December 1972, after consultation withmember countries, the Organization for Economic Cooperation and Development(OECD) forecast that combined real GNP for its seven largestmember countries, including the United States, would grow at an annualrate of 6/ 2 percent from the second half of 1972 to the first half of 1973.By July 1973, before second quarter data were complete, the OECD hadrevised the estimate upward to 8*4 percent, considerably above the growthrate of potential output. The unexpected boom was widespread; the actualrate of growth exceeded earlier forecasts in all but one of the countries. Atno time since the early 1950's had such strong expansion occurred simultaneouslyin the larger member countries of the OECD, and much morepressure was placed on capacity than had been anticipated. (For a view ofthe effect that rapid expansion had on inflation in OECD countries seeTable 23.)The rate of expansion in the United States from the second half of 1972to the first half of 1973 was fairly close to that predicted by the Administration,but the rise in output in the first quarter of the year was steeper thanexpected. Production in some industries was pushed to its limit sooner thanhad been anticipated, and unexpected shortages also occurred in others.The third change in the economic outlook concerned the large declinein the foreign exchange value of the dollar. The realignment of exchangerates on February 12 resulted in a decline in the value of the dollar of about5 percent with respect to our major trading partners. From March 19, when92