Focus on Economic Data: Consumer Price Index and Inflation, November 16, 2011
This lesson printed from:
Posted December 16, 2011
Author: Douglas Haskell
Posted: December 16, 2011
This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported November 16, 2011, by the U.S. Bureau of Labor Statistics (BLS) for the month of October, 2011. Students will read the BLS report, analyze the meaning of the CPI data, determine the change in consumer prices, and explore the impact of the change in the price level on themselves, their families, consumers, and producers.
- Identify the rate and change in the consumer price index and rate of inflation in the United States in October, 2011.
- Identify factors that have influenced recent changes in the price level.
- Describe how inflation impacts different groups in the economy.
- Distinguish between the CPI-U, core rate and other measures of inflation.
Current Key Economic Indicatorsas of May 5, 2013
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.2 percent in March after increasing 0.7 percent in February. The index for all items less food and energy rose 0.1 percent in March after rising 0.2 percent in February.
Total nonfarm payroll employment rose by 165,000 in April, and the unemployment rate was little changed at 7.5 percent. Employment increased in professional and business services, food services and drinking places, retail trade, and health care.
Real gross domestic product increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...
Each month, the U.S. Bureau of Labor Statistics (BLS) releases an estimate of the level of the consumer price index (CPI) and the rate of inflation in the United States for the previous month. The report provides the most recent current and seasonally adjusted consumer price indexes for all urban consumers, urban wager earners, and the chained index, plus a breakdown by major expenditure groups. The BLS also collects price level data for major metropolitan areas and regions.
This lesson focuses on the November 16, 2011, BLS press release of data on the consumer price index for the month of October, 2011.
[NOTE: You can subscribe to receive monthly BLS email news releases. To subscribe, go to the BLS News Service Subscription Page. www.bls.gov/bls/list.htm ]
[NOTE on the CPI and Inflation "Focus on Economic Data" Lessons: During the first semester of the 2011-2012 school year (September-December, 2011), EconEdLink will publish four lessons on "Consumer Price Index and Inflation." During this time period, the Focus on Economic Data will begin with the "basics" in September and progressively focus on more complex data, issues, and comparisons. All monthly lessons will include the current data and significant recent changes.
- September: CPI and inflation (deflation) basics: What is the CPI? What is inflation and deflation? How are they measured? What do they mean?
- October: Details and issues about the measurements and meaning of the measurements of the price level, adding additional concepts. March: Detailed breakdown of the data by region and other criteria (trends, identifying trends and comparisons of regions and demographic groups).
- November: U.S. regional and global price level and inflation comparisons.
- December: The relationships of CPI and inflation data to other economic data, such as GDP, employment. etc. and the business cycle. End of year price level summary and potential issues.
Key Economic Indicatorsas of November 16, 2011
On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in October after increasing 0.3 percent in September. The index for all items less food and energy rose 0.1 percent in October, the same increase as in September.
Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment in the private sector rose, with modest job growth continuing in professional and businesses services, leisure and hospitality, health care, and mining. Government employment continued to trend down.
Real gross domestic product increased at an annual rate of 2.5 percent in the third quarter of 2011 according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.
The FOMC decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
On November 17, the news headlines reported that consumer prices, as measured by the CPU-U, decreased by 0.1 percent in October, 2011. A closer examination of the BLS announcement shows that while the "headline" or "all-items" CPI-U decreased, the "core" index, the price level measurement that excludes energy and food prices, increased by 0.1 percent in October. October was an example of how the prices of one key product group can influence the reported overall price level data.
[Teacher Note: This is a good time to reinforce the difference between the "all items" CPI-U and the "core" CPI index. For details about the core index, go to: www.bls.gov/cpi/cpifaq.htm
Take a look at the latest BLS report on the Consumer Price Index to better understand how these changes might affect your life and the economy.
U.S. Bureau of Labor Statistics News Release
Consumer Price Index - October, 2011
Released November 16, 2011
"The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.5 percent before seasonal adjustment."
The BLS announcement explained the impact of energy prices on the reported CPI-U. "A decline in the energy index more than offset small increases in the indexes for food and all items less food and energy to create the all items decline. The energy index turned down in October after increasing in each of the three previous months as the gasoline and household energy indexes declined after a series of seasonally adjusted increases. The food index rose in October, but posted its smallest increase of the year as the fruits and vegetables index declined sharply."
The decline in energy prices in October may not last until you read this lesson, as oil prices increased significantly in early November - after the BLS reporting period. An Associated Press story, reported by Yahoo! Finance on November 9, 2011, cited "rising demand" as a factor in the increase of crude oil prices to above $97 a barrel. finance.yahoo.com/news/oil-price-rises-us-supplies-181325118.html
"The index for all items less food and energy increased 0.1 percent in October; this was the same increase as last month and matches its smallest increase of the year."
Other market categories that changed significantly in October were mentioned in the November 16 announcement. "While the shelter and medical care indexes accelerated in October and the apparel index turned up, the indexes for new vehicles, used cars and trucks, airline fare, and recreation all declined."
[Teacher Note: Ask your students if they have noticed any recent price increases. Remember to mention "seasonal adjustments." Some items may decrease in price during the holiday season.]
How has the price level changed since October 2010?
"The all items index has risen 3.5 percent over the last 12 months, a lower figure than last month's 3.9 percent increase, as the 12-month change in the energy index fell from 19.3 to 14.2 percent. In contrast, the 12-month change for all items less food and energy edged up from 2.0 to 2.1 percent. The food index 12-month change was 4.7 percent, the same figure as in September." Remember, the 12 month increase or decrease in the index is reported at an annual rate, which will change as the reporting period becomes the most recent 12 months. At the end of a calendar year, the 12 month index becomes the "official" annual rate for the year.
The BLS publishes a chart of the annualized rates of change of the CPU-I buy month and annually for each year. Take a look at the chart to see how the annualized rate can change from month to month depending on changes in different product groups (especially energy) in any given month. data.bls.gov/timeseries/CUUR0000SA0?output_view=pct_12mths So far, the annualized rate of CPI-U change in 2011 has ranged from a 1.6 percent increase in January to 3.9 percent increase in September. 2010 saw a fairly stable price level overall and more stable energy prices.
Teacher Note: You can determine the change in the CPI-U for any one year period using the BLS "Inflation Calculator" www.bls.gov/data/inflation_calculator.htm
Figure 1, below, shows the monthly changes in the CPI-U from 2002 through October, 2011. Note the recent periods of high inflation, such as September 2005, November 2007 and June-July 2008. The period of price level decline, August-December 2008 is the beginning of the most recent recession.
What Categories of Consumer Prices Changed in October and Over the Last Year?
Figure 2, below, shows the price level changes for the major spending categories of the CPI market basket that increased and decreased on the month of February and over the past year. Do you see any patterns?
Figure 2: Percent Changes in CPI-U
Oct. - Oct.
|Food at home||0.1%||6.2%|
|Food away from home||0.1%||2.7%|
|All items less food and energy||0.1%||2.1%|
|Used cars and trucks||-0.6%||5.2%|
|Medical care services||0.5%||3.1%|
[Teacher Note: Point out that although most energy prices fell in October, they were still up significantly for the past 12 month period. If you show the chart of gasoline prices over the years, you can see how they impacted the overall price level (CPI-U) change. data.bls.gov/cgi-bin/surveymost ]
[Teacher Note: A good discussion for students may be to identify their personal consumer behaviors and wants that influence how they are affected by inflation. Ask: Who is affected the most by inflation? Possible answers: Those on a fixed income who cannot increase their income, lenders who are repaid with dollars that have lost purchasing power; people who are more dependent on fuel and food in their budgets.]
The Nominal Level of the CPI-U in October 2011
The nominal (current dollar) level of the CPI-U in October, 2011, was 226.421. That is an increase of 7.71 from October, 2010. Remember, the level of the CPI-U is determined from the base year level of 100. The base year for most of the spending categories is the period of 1982-84. That means the market basket of goods and services that cost $100 in 1983-84 increased to $218.71 in October 2010, and to $226.42 in October, 2011.
How much inflation have we experienced since 1982-84? The CPI-U index has increased by 126.421 points, so the price level has slightly more than doubled in that period of time, a 126% increase in 26 years. Simply put, it has increased by an average of about 3-4 percent per year.
Take another look at Figure 1, showing the monthly changes in the CPI-U from 2002 through October, 2011. Note again, the period of increased and decreased prices. The average has been 3-4 percent per year.
For more detailed price index data for October, 2011, see Table 2 of the BLS news release. Consumer Price Index – October 2011. www.bls.gov/news.release/cpi.nr0.htm
BLS Note on Seasonal Adjustment
“Because price data are used for different purposes by different groups, the Bureau of Labor Statistics publishes seasonally adjusted as well as unadjusted changes each month. For analyzing general price trends in the economy, seasonally adjusted changes are usually preferred since they eliminate the effect of changes that normally occur at the same time and in about the same magnitude every year--such as price movements resulting from changing climatic conditions, production cycles, model changeovers, holidays, and sales.”
“The unadjusted data are of primary interest to consumers concerned about the prices they actually pay. Unadjusted data also are used extensively for escalation purposes. Many collective bargaining contract agreements and pension plans, for example, tie compensation changes to the Consumer Price Index before adjustment for seasonal variation.”
[Teacher Note: For more information, go to the CPI home page at www.bls.gov/cpi/ or contact the CPI Information and Analysis Section at (202) 691-7000.]
U.S. Regional Differences in Price Levels
The BLS also collects and reports consumer price level changes in four large regions of the United States and major metropolitan areas through its regional offices. Price levels will vary from region to region for a variety of reasons.
Figure 3, below, show some of the key regional price data. Note some regional differences. The general price level is much higher in the Northeast than in other regions. Prices are generally lower in the Midwest. Energy prices increased more in the past year in the Midwest and less in the Northeast.
Figure 3: Regional Price Level Changes
Oct. 2010 to
Oct. 2010 to
|*West region energy price change is September 2010 to September 2011.|
The following are the most recent BLS press releases on the regional consumer price indexes for October, 2011, in the Northeast, Midwest, and South census regions, and for the September in the West region. [Note: Data for the West region is reported at a later date than other regions.] The BLS also reports data broken-down by smaller geographic regions, states, major metropolitan areas and larger cities.
Consumer Price Index, Northeast Region – October 2011
“Regional Prices Down 0.1 Percent Over the Month; Up 3.6 Percent Over the Year”
“The Consumer Price Index for All Urban Consumers (CPI-U) in the Northeast region inched down 0.1 percent in October, the U.S. Bureau of Labor Statistics reported today. Sheila Watkins, the Bureau’s regional commissioner, noted that an over-the-month decrease in the energy index (-2.8 percent) was nearly offset by increases in both the all items less food and energy (0.1 percent) and food (0.3 percent) indexes. (Data in this report are not seasonally adjusted. Accordingly, month-to-month changes may reflect the impact of seasonal influences.)”
“Over the last 12 months, the CPI-U increased 3.6 percent. (See chart 1 and table A.) The all items less food and energy index and the energy index advanced over the year, up 2.3 and 13.7 percent, respectively. Also contributing to the recent increase in the all items index were higher prices for food, which rose 4.6 percent since October 2010.”
The Northeast region is comprised of Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont.
Consumer Price Index, South Region – October 2011
Prices in the South down 0.2 percent over the month; up 3.7 percent over the year
“The Consumer Price Index for All Urban Consumers (CPI-U) for the South edged down 0.2 percent in October, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Janet S. Rankin noted that energy prices declined 4.1 percent over the month, while the indexes for food and all items less food and energy rose 0.4 and 0.3 percent, respectively. Within the all items less food and energy group, the indexes for shelter, apparel, and medical care were among those that recorded increases. (Data in this report are not seasonally adjusted. Accordingly, month-to-month changes may reflect the impact of seasonal influences.)”
“Over the last 12 months, the CPI-U advanced 3.7 percent. The index for all items less food and energy rose 2.1 percent over the year.”
The South Region includes: Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia.
Midwest Region Consumer Price Index – October 2011
Prices in the Midwest down 0.6 percent in October led by falling motor fuel costs
“The Consumer Price Index for All Urban Consumers (CPI-U) in the Midwest declined 0.6 percent in October the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Stanley W. Suchman noted that the monthly decrease was largely attributable to lower prices for motor fuel and electricity which led a decline of 7.0 percent in the energy index. Food prices were little changed (-0.1 percent) and the index for all items less food and energy rose 0.2 percent.”
“Over the last 12 months, the CPI-U rose 3.3 percent. The energy index, which includes motor fuel and household fuels, was up 12.5 percent since last October and the index for food rose 4.8 percent. Excluding food and energy, the CPI-U increased 2.0 percent over the year.”
The Midwest region is comprised of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.
Consumer Price Index, West Region – September 2011
“Area prices were up 0.4 percent over the past month, up 3.5 percent from a year ago”
“Prices in the West Region, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), advanced 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. (See table A.) Regional Commissioner Richard J. Holden noted that the September increase was influenced by higher prices for gasoline and apparel. (Data in this report are not seasonally adjusted. Accordingly, month-to-month changes may reflect seasonal influences.)”
“Over the last 12 months, the CPI-U advanced 3.5 percent. (See chart 1.) Energy prices jumped 18.2 percent, largely the result of an increase in the price of gasoline. The index for all items less food and energy rose 1.9 percent since September 2010.”
The West Region covered in this release is comprised of the following thirteen states: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.
How have prices changed in your region done, compared to other regions?
All regional data links:
[Teacher Note: Assign groups of students to the four regions. They can examine their assigned region's data and summarize it for the whole class. They can speculate about the factors that have influenced prices in their assigned region.
The BLS also publishes data for the major U.S. metropolitan areas. If your school is in one of the major metropolitan areas, students can read their local consumer price index data. www.bls.gov/bls/regnhome.htm .]
International Price Level Comparisons
The BLS also publishes comparisons of price level data for the major industrialized nations; the United States, Canada, Japan, France, Germany, Italy, Sweden, Switzerland, and the United Kingdom.
Take a look at the most recent data for the nine nations. [Link: www.bls.gov/fls/chartbook/2012/section4.htm ] The BLS chart shows the consumer price indexes in the nine countries, by percent change from same period of previous year, for the years 1995 through September, 2011.
What nations have experienced more or less inflation than the United States during this time period? Take a look at Japan, where the price level fell (deflation) each year from 1999 to 2005, and again in 2009 and 2010. Many refer to the Japanese economy during the late 1990s and early 2000s as the "lost decade." Note that the United Kingdom has experienced higher levels of annual price increases over the past several years than the other nations.
In a more detailed annual report, the BLS compares the consumer price indexes of 16 and 2 regions, the "International Indexes of Consumer Prices. Go to this link: www.bls.gov/fls/intl_consumer_prices_annual.htm . Look at the graphs of the annual CPI changes for the nations. Do you see any patterns? Notice that all of the nations experienced a greater than normal increase in their CPIs in the year 2008.
[Teacher Note: For more details about the CPI, go to the BLS web page, www.bls.gov/cpi/ ]
Calculating the Price Index Changes
The BLS website explains the process for calculating the CPI. “Movements of the indexes from one month to another are usually expressed as percent changes rather than changes in index points, because index point changes are affected by the level of the index in relation to its base period while percent changes are not. The example below illustrates the computation of index point and percent changes.”
“Percent changes for 3-month and 6-month periods are expressed as annual rates and are computed according to the standard formula for compound growth rates. These data indicate what the percent change would be if the current rate were maintained for a 12-month period.” See Figure 4, below, for the formula for determining the rate of inflation over a one year period
|Determining the CPI-U Index Point Change|
|Current Consumer Price Index (October 2011)||226.421|
|Less Previous Period CPI (October 2010)||218.711|
|Equals Index Point Change||7.710|
|Determining the Index Percent Change|
|Index Point Change||7.710|
|Divided by the Previous Index||218.771|
|Results Multiplied by One Hundred||0.035 x 100|
|Equals Percent Change (annual rate)||3.5%|
[Teacher Note: Given the levels of CPI data from one period to another, nationally, by region or local area, students should be able to use this formula to determine a nation’s rate of inflation.]
Finding Additional Data and Details in the BLS Report
The monthly BLS CPI report includes links to additional price level data, including expenditure categories, regional and metropolitan area price data.
Industry Price Level Data
[Teacher Note: For more details about the CPI, go to the BLS web page, www.bls.gov/cpi/ ]
Again, October 2011 was a good example of the difference between the "headline" or reported CPI-U and the "core" index that excluded energy and food prices. Over the past several year, energy prices have been the "wild card" of energy in a period of relatively stable prices in the United States.
U.S. consumers have seen monthly gasoline prices go from $1.64 in January 2004, to $4.14 in July 2008, and from $1.74 in December 2008, back up to $3.98 in May, 2011. (Link: data.bls.gov/cgi-bin/surveymost )
Keep an eye on energy prices to see how your "cost of living" changes when the prices of things you purchase regularly go up or down.
Short Essay Question:
1. Which do you think is a more meaningful measurement of consumer prices over time - the CPU-U for all items or the "core rate" (minus energy and food)?
[Student answers will vary. The argument for the "core rate" of inflation is that energy and food prices have historically been much more volatile and have tended to rise and fall above the CPI-U without energy and food included. Other students may argue that energy and food prices are a real part of the consumers' market basket and should be included. Students may reason that including energy and food when looking at month-to-month or short-time changes is more realistic, and that the core rate is a better comparison of price levels over a long time period.]
10 gal. of regular gasoline
2 "first run" move tickets
2 - #3 "Extra Value" Meals
1 pair of Levis 501 jeans
What do you think has happened to the prices of the items in your "market basket" in the past year?
What do you think will happen to those prices in the coming year?
Does taking the food and energy items out of your basket make a difference?