Economic Report of the President

eemergence of modest but sustained economic growth, productivityis projected to increase slightly faster than its underlying trend rateof 1 to IV2 percent. This productivity performance, in conjunctionwith the slowdown in the increase in hourly compensation projectedfor late 1981 and into 1982, should substantially moderate increasesin unit labor costs.Product Prices. The large share of wage and salary payments in totalbusiness costs makes the advance of unit labor costs a fundamentaldeterminant of the trend increase in product prices. Thus, the prospectsfor product prices basically mirror those for unit labor costs,with the overall rate of price inflation as measured by the GNP deflatorexpected to be noticeably improved by 1982. Over the 4 quartersof 1982 the overall inflation rate is expected to drop to about 8%percent. During 1981, however, the rise in the deflator should roughlymatch the 1980 increase of 10 percent. Adoption of the motor fuelstax could add another one-fourth to one-half percentage point togrowth in the deflator. The near-term projection for inflation reflectsdevelopments in energy discussed above and agricultural markets,which deserve special attention.Food Prices. Significantly higher prices for food are anticipated for1981, with a rise of about 12 percent likely. The production adjustmentsalready underway by meat producers, together with the effectsof the summer-long drought, will exert upward pressure on commodityprices. Continued increases in energy costs and labor wage ratesimply that food marketing costs will increase at about the rate of generalinflation.Meat price increases will probably be most visible to the averageconsumer. After 5 years of steady increase, pork production is expectedto fall 6 to 8 percent. Beef production is likely to be onlyslightly higher than its low level in 1980. Live animal prices are forecastto be much higher than in 1980. High prices (and limited supplies)of feedgrains will limit increases in poultry production. Meatsupplies will also be tight on a world scale. While the seasonal patternof the 1981 meat price increase is still in doubt, it appears thatretail meat prices will rise most notably from April through Augustbefore stabilizing (and perhaps declining) late in the year. Crop conditionsin the United States and worldwide will determine this pattern.Generally poor crop conditions early in the year could pushgrain prices much higher. Under these conditions, retail meat priceswould be lower in the first half (as herds are liquidated) but higher inthe second half than is now expected.Agricultural conditions also point to higher prices for most otherfood items during 1981. Commodity price increases resulting from175