108
I
themselves determined by the incomes of those who produce the goods and servises at each stage of the productive process in other words by wages
2 and salaries and profits. Increases in incomes need not necessarily lead to rises in costs and prices; but they do so whenever they outrun the growth of production, that is, whenever labour costs and profit margins rise per unit of output.
8. The level of incomes depends on the balance of supply and demand throughout the economic system as a whole. If demand is significantly in excess of the supplies available to meet it, the pressure of demand will itself contribute to forcing up prices. Prices can also be forced up by pressure: for higher incomes even when the level of demand is not excessive. But, generally speaking, the higher the level of demand in relation to supply, the easier it becomes to obtain larger money incomes and to pass on any resultant increases in costs in the form of higher prices.
9. The history of prices since the war falls broadly into four phases: -
(i) The immediate legacy of the war was an accumulation of demand, combined with a shortage of goods due to the dislocation of pro- duction. World prices therefore rose sharply, and from 1946-1948 the average prices of our imports increased by 25 per cent. This increase would, if it had been the only factor at work, have raised the average level of our final prices by about 5 per cent. But it was accompanied by excessive demand inside this country and by wide- spread pressure for higher incomes; and because this increase in incomes outstripped the growth of output, costs of production rose, the rise being reflected in an increase not of 5 per cent., but of 15 per cent., in the average level of prices.
(ii) In 1948 the White Paper on Personal Incomes, Costs and Prices (Cmd. 7321) set out the dangers of further price rises. During 1948 and 1949 incomes did not increase much faster than output, and costs of production were therefore considerably more stable. Since at the same time world supplies were becoming more plentiful, import prices also were rising less fast. As a result, our own final prices rose relatively little (by 3 per cent. between the two years 1948 and 1949). (iii) This period of comparative stability was ended by the act of devaluation of sterling in September 1949, which followed the weakening of the sterling area's balance of payments in that year. One of the ultimate causes of that devaluation was the earlier post- war rise in prices; and one of the consequences was a marked rise in import prices, measured in sterling. Then, in 1950, the Korean War provoked a fresh outburst of world demand, particularly for primary products; and import prices rose sharply. This resulted in a rise in retail prices in this country, which itself initiated a demand for compensating increases in incomes. These increased incomes. added substantially to costs, because at that time it was proving. difficult to incease output: shortage of steel retarded production in 1951, and the lower levels of home and overseas demand for textiles, clothing and other consumer goods, which were in part a reaction from the conditions created by the Korean War, led to an actual fall: in output in 1952. In the event, our final prices rose by 23 per cent.. between 1949 and 1952.
•
(iv) The reduction in the food subsidies and changes in indirect taxes in 1952 added a little to prices in the latter part of that year and in the early months of 1953. But after 1952 the growth of production was resumed, and during the whole of that year and the first part of 1954 import prices were falling. At home, however, incomes were