January 10, 1973
December sales at leading retail outlets in Tenth District metropolitan areas were, in most instances, well above those of a year earlier. Although the picture varies from firm to firm and place to place, it appears that District retail sales increases may not have kept pace with those of the nation. However, District sales activity was strong enough to support large demand deposit inflows at District commercial banks, and strong increases in consumer installment and credit card loans as well. Adverse weather conditions, which had some restraining influence on District retail sales growth, are contributing (along with other factors) to a farm products-and-food price situation that is not favorable to stability in consumer prices.
Adverse weather conditions in several metropolitan areas appear to have held down December retail sales growth in the District, at least by comparison with the record increases experienced by national retail chains. However, most District retailers interviewed reported very solid gains in sales over December 1971. Descriptive adjectives ranged from "favorable" to "very nice" to "anywhere from tremendous to fantastic". Although sales increases generally ranged across the board, some retailers noted particularly strong gains in furniture, home improvement items, and sportswear.
Tenth District bankers described recent demand deposit inflows in terms ranging from "above average" to "spectacular" and "greatly beyond expectations". These rapid increases in demand deposits were attributed to very strong retail sales activity during the holiday season. Large increases were reported in consumer installment and credit card loans, probably due also to Christmas purchases. Increases in time and savings deposits were much more modest, with CDs appearing to decline despite inflows by governments investing tax revenues. Bankers made few changes in CD rates during December; some banks in large District cities reported that they are paying maximum interest rates on most classes of deposits. Most, however, did not appear to be concerned about possible disintermediation, at least in the near term. Few banks changed in the prime lending rate in December since most were already charging 6 percent or more to prime customers.
A few bankers expressed concern that the recent rise in short-term interest rates would bring on some form of controls. Most, however, did not anticipate controls unless interest rates rose substantially further. Virtually all the bankers interviewed thought that controls, whether in the form of limitations on bank profits or interest rate ceilings, would not be effective, particularly in the long run. One banker expressed the view that, if effective, controls would discriminate against the banking industry, since he anticipated that interest rates on bank assets would be controlled, while those on bank liabilities would not.
Continued adverse weather conditions, sharp boosts in farm commodity prices, reports about smaller increases in prospective pork supplies than earlier anticipated, and unusually brisk consumer demand have all combined to place food prices in the national headlines once more. The above developments greatly dim the chances that food prices will prove less troublesome as a source of inflation in 1973. Farm prices, led by upturns for wheat, cattle and hogs, jumped 5 percent for the month ended December 15, thus pushing the level 18 percent above a year ago. Despite higher prices, profit margins in livestock feeding have narrowed owing to the sharp increase in feed costs. As a result, red meat supplies will probably be smaller this year than earlier expected, since producers likely will reduce the weights at which the animals are marketed and at the same time curb or revise downward their plans for expansion. The most recent hog report—showing a smaller than expected increase in pork supplies for 1973—attests to the likelihood of this development.
Several retail food chains reported that, while their prices on average have been fairly stable, the recent spurts in wholesale food prices will likely result in upward adjustments at retail. Egg prices have already moved up sharply, and further increases in milk prices are contemplated. Rather than raising meat prices, the merchants have elected to let their margins suffer but, unless wholesale prices fall off soon, retail meat prices can be expected to rise, perhaps sharply. On balance, then, the prospects of holding food price increases within tolerable limits are not particularly bright under the present form of wage-price controls.