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May 1985, Vol. 108, No. 5
Input prices and cost inflation
in three manufacturing industries
Over the past two decades, U.S. industries have exhibited marked changes in their use of primary and secondary resources. Such changes have been due, at least in part, to the volatility of resource markets. For example, the rapidly rising energy prices of the 1970's led many firms to substitute away from energy and toward relatively less expensive inputs such as capital or labor. The ease with which producers are able to make these substitutions partly determines output price increases in their respective industries. Such price increases, in turn, affect factor substitution at later stages of processing, product substitution in consumption, and the general rate of inflation in the economy.
In this article, we analyze in detail the input-to-product inflation link in three key manufacturing industries: autos (Standard Industrial Classification 371), steel (SIC 331), and plastics (SIC 282).1 These industries, particularly autos and steel, have undergone dramatic changes during the past 15 years and have been the subject of much recent research. Yet, relatively little attention has been given to the transmission of inflation between resource and product markets in the industries. Our study attempts to partially fill this gap with empirical evidence that quantifies the nature of this transmission.
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1 The detailed components of the industries studied are presented in the Standard Industrial Classification Manual, prepared by the U.S. Office of Management and Budget. Autos (SIC 371) comprises manufacturers of motor vehicles and passenger car bodies; truck and bus bodies; motor vehicle parts and accessories; and truck trailers. Steel (SIC 331) covers blast furnaces, steel works, and rolling and finishing mills; electrometallurgical products; steel wire drawing and steel nails and spikes; cold rolled steel sheet, strip, and bars; and steel pipe and tubes. Plastics (SIC 282) covers the manufacture of plastics materials, synthetic resins, and nonvulcanizable elastomers; synthetic rubber (vulcanizable elastomers): and manmade fibers.
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