Economic Report of the President

Recognizing this, CWPS in 1978 established a price decelerationstandard which called for all firms to reduce the rate of their averageprice increases in the program year by one-half percentage pointbelow their increases in a base period. Systematically different movementsin productivity and other cost elements among firms and industriesshould be at least roughly reflected in their base year experience.CWPS found, however, that it had to permit firms to devisevarious ways of adjusting for uncontrollable cost increases and had toprovide separate standards for certain industries, like retailing andfood processing.For several reasons, prices are more difficult to measure than pay.In some industries, such as wholesale and retail trade, prices for thesame item vary from week to week. Some firms also give quantity discounts,so that prices for the same item vary from customer to customer.Even if the price of each item did not fluctuate, a small storewith only a few employees may sell thousands of different products.Such a firm might have little trouble with the paperwork necessaryfor a pay TIP, but a price TIP would probably be beyond its administrativecapabilities.Furthermore, a price TIP would face problems posed by new productsand quality change in old products. Since new products do nothave old prices, no price increase can be calculated for them. Instead,a price standard might have to be based on the firm's averagemarkup over input costs or on the prices of similar products sold bythe same firm or other firms. A related issue is the treatment of qualitychanges. Disregarding these changes might be the best solutionfor a temporary price TIP, even though doing so would tend to discourageinnovation. Alternatively, a program that exempted goodswhose quality had changed, and therefore allowed price increasesabove the standard, would encourage minor product changes that didnot really increase quality. Finally, products whose quality improvedcould be treated like new products, with price increases based onaverage markup or on the price changes of similar goods.A price TIP would have to allow firms to pass through to consumerscertain increases in the cost of their inputs. For instance,a utility company could not be expected to keep price increasesbelow a TIP standard for long if the price of the oil it used to generateelectricity suddenly doubled. To treat the utility fairly, a priceTIP would have to allow the firm to raise electricity prices to coverthe increased cost of oil. The problem in designing a price TIP is todecide which costs should be granted exemptions, while still encouragingfirms to substitute cheaper inputs for more expensive ones.Given the greater complexity of devising a workable price standard,a price TIP should probably levy penalties and be confined to66