This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported December 16, 2011, by the U.S. Bureau of Labor Statistics (BLS) for the month of November, 2011. Students read data from 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.

KEY CONCEPTS

Inflation, Macroeconomic Indicators, Price Stability, Real vs. Nominal

STUDENTS WILL

  • Identify the current level and recent changes in the consumer price index.
  • Identify the factors that have influenced recent changes in the rate of inflation.
  • Identify the potential policy implications of the current economic conditions, including deflation.
  • Describe how inflation and deflation impact individuals, families, and different groups in the economy.

Current Key Economic Indicators

as of May 5, 2013

Inflation

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.

Employment and Unemployment

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 GDP

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.

Federal Reserve

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...

INTRODUCTION

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 wage 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 December 16, 2011, BLS press release of data on the consumer price index for the month of November, 2011.

[Note to teacher: You can subscribe to receive monthly BLS email news releases. To subscribe, go to the BLS News Service Subscription Page .]


[Note to teacher: For the latest updates on U.S. economic indicators, go to:

Note on the CPI and Inflation "Focus on Economic Data" Lessons:

During the first semester of this 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 January 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.
  • November: Detailed breakdown of the data by region and other criteria (trends, identifying trends and comparisons of regions and demographic groups).
  • December: End of year price level summary and potential future issues. THIS LESSON]

MATERIALS

 


Key Economic Indicators

as of December 16, 2011

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers was unchanged in November after decreasing 0.1 percent in October. The index for all items less food and energy rose 0.2 percent in November after increasing 0.1 percent in October.

Employment and Unemployment

The unemployment rate fell by 0.4 percentage point to 8.6 percent in November, and nonfarm payroll employment rose by 120,000. Employment continued to trend up in retail trade, leisure and hospitality, professional and business services, and health care. Government employment continued to trend down.

Real GDP

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.

Federal Reserve

The Committee (FOMC) also 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.

PROCESS

Economic News Release: Consumer Price Index - November 2011
U.S. Bureau of Labor Statistics
Released: December 16, 2011

"The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment."

No change in the general price level (as measured by the CPI) in November.  Is this good news? The purchasing power of incomes was stable?  Is this bad news? Slow economic growth and high unemployment are not putting any pressure on the price level.

The Federal Government is achieving one of its primary macroeconomic goals - price stability - without any new policy actions.  Unfortunately, those macroeconomic policies are also unable to end the persistently high unemployment rate and slower-than-wanted real GDP growth rate.

What About Energy and Food Prices?

"The energy index declined for the second month in a row and offset increases in the indexes for food and all items less food and energy. As in October, the gasoline index fell sharply and the index for household energy declined as well. The food index rose slightly in November, though the index for food at home declined as four of the six major grocery store food group indexes fell."

The "Core" CPI - Less Food and Energy

"The index for all items less food and energy increased 0.2 percent in November following increases of 0.1 percent in each of the prior two months. The indexes for shelter, medical care, apparel, and personal care all rose. These increases more than offset declines in the indexes for new vehicles and used cars and trucks."

"The all items index has risen 3.4 percent over the last 12 months. This is a slightly smaller increase than last month's 3.5 percent figure, as the 12-month change in the energy index declined from 14.2 percent to 12.4 percent. The 12-month change in the food index also declined slightly, from 4.7 percent to 4.6 percent. In contrast, the 12-month change in the index for all items less food and energy continued to rise, reaching 2.2 percent in November."

Reminder: The CPI-U, reported by the BLS, includes all categories of consumer prices and the “core” index is all price categories, excluding food and energy. According to the BLS, this measurement of price level change "is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks that cannot be damped through monetary policy. However, all consumer goods and services, including food and energy, are represented in the headline CPI (included food and energy)."

[Teacher Note:  Ask your students if they think the "headline" CPI (including energy and food) or the "core" rate (excluding energy and food) is the best measurement of inflation or the price level as it is meaningful to consumers?]

The 12-Month Change in the Price Level

"Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment."

"The index for all items less food and energy has increased 2.2 percent over the last 12 months, the largest such increase since 2008. The 12-month change in the shelter index has been steadily increasing and reached 1.8 percent in November. The 12-month change in the medical care index was 3.4 percent, its highest level in over a year, while the apparel index has risen 4.8 percent over the last 12 months, the largest figure since 1991"

Food and energy are excluded from the "core" rate of inflation because they tend to be more volatile over the short term, typically moving up and down around a more stable trend line over a longer period of time. One debate among economists and researchers is whether the overall CPI-U or the core rate is the most reliable and meaningful measure of inflation. To people who consume food and use energy daily, energy and food prices are a critical part of the cost of their budget. To others, the volatility of food and energy prices makes them an unreliable indicators of future costs.

Figure 1, below, shows the monthly changes in the CPI-U for the major expenditure categories from October to November 2011 and the one-year change from November 2010 to November 2011. 

Figure 1:  Percent Changes in CPI All Urban Consumers
U.S. City Average
November 2011

(Seasonally adjusted)
  November
2011
12 months
Nov. - Nov.
All items 0% 3.4%
   Food 0.1% 4.6%
   Food at home -0.1% 5.9%
   Food away from home 1 0.3% 2.9%
   Energy -1.6% 12.4%
   Energy commodities -2.1% 19.9%
   Gasoline -2.4% 19.7%
   Fuel oil 1 2.7% 25.0%
   Energy services -0.7% 1.7%
   Electricity 0.4% 2.7%
All items less food and energy 0.2% 2.2%
   New vehicles -0.3% 3.3%
   Used cars and trucks -0.1% 4.9%
   Apparel 0.6% 4.8%
   Shelter 0.2% 1.8%
   Transportation services 0.1% 2.6%
   Medical care services 0.5% 3.5%
1 Not seasonally adjusted


[Teacher Note: Ask your students if they have notice any recent signs of rising prices or falling prices - other than gasoline prices.  This is a good time to explain that, according to the online BLS Glossary, inflation is "a process of continuously rising prices, or equivalently, of a continuously falling value of money."  The change in some prices in one or two months may not be considered "inflation." ]

The BLS measurement of the CPI-U includes all urban consumers, representing about 87 percent of the total U.S. population. "It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural non-metropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals." Source: Whose Buying Habits Does the CPI Reflect?

[Teacher Note: Students can discuss which prices they have noticed increasing or decreasing in the past year or month. Their experiences will depend on their buying habits. They may not notice furniture prices, but they will notice gasoline prices.]

With a few exceptions, these price indexes are seasonally adjusted. According to the BLS, "many economic series, including the CPI, are adjusted to remove the effect of seasonal influences-those which occur at the same time and in about the same magnitude every year. Among these influences are price movements resulting from changing weather conditions, production cycles, changeovers of models, and holidays."

Calculating the CPI-U

The BLS explains how the CPI-U is calculated:

"The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 25,000 retail establishments-department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments. All taxes directly associated with the purchase and use of items are included in the index."

"Prices of fuels and a few other items are obtained every month in all 87 locations. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other areas. Prices of most goods and services are obtained by personal visits or telephone calls of the Bureau's trained representatives."

"In calculating the index, price changes for the various items in each location are averaged together with weights, which represent their importance in the spending of the appropriate population group. Local data are then combined to obtain a U.S. city average."

"For the CPI-U and CPI-W separate indexes are also published by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for 27 local areas. Area indexes do not measure differences in the level of prices among cities; they only measure the average change in prices for each area since the base period. For the C-CPI-U data are issued only at the national level. It is important to note that the CPI-U and CPI-W are considered final when released, but the C-CPI-U is issued in preliminary form and subject to two annual revisions."

"The index measures price change from a designed reference date. For the CPI-U and the CPI-W the reference base is 1982-84 equals 100.0. The reference base for the C-CPI-U is December 1999 equals 100. An increase of 16.5 percent from the reference base, for example, is shown as 116.5. This change can also be expressed in dollars as follows: the price of a base period market basket of goods and services in the CPI has risen from $10 in 1982-84 to $11.65." 

What is the Current Level of the CPI-U?

The CPI is an index, measuring the price level change from a base period. The current base period of the CPI-U when the price of the "market basket" of goods and services was $100, is the 1982-84 period (averaged).

The current consumer price index number is 226.230. That means that the market basket of goods and services that cost $100 in 1982-84 now costs slightly over $226. The basket cost $226.421 in October, 2011 and decreased by about 20 cents in the last month. The cost of the market basket increased $7.43 between November, 2010, and November, 2011. 

Though the 12-month trend is for the price level to increase, the CPI defied the trend in November.  Although you can say that there was some "inflation" in the past year, there was no "inflation" in November.

Figure 2, below, shows the major spending categories of the CPI-U in November, 2011. Each category is given a "weight," representing the estimated portion of the total market basket spent on that category, or, what the BLS calls "relative importance." Each category includes a variety of individual items. For instance, the category of "transportation" includes the price levels of new and used motor vehicles, motor fuel, motor vehicle parts and equipment, motor vehicle maintenance and repair, and public transportation.

Figure 2:  Consumer Price Index (CPI-U)
Weights and Index Levels by Major Category
November 2011
Spending Category Weight* Index Level
Food and beverage 14.8% 230.656
Housing 41.5% 219.969
Apparel 3.6% 127.285
Transportation 17.3% 211.358
Medical Care 6.6% 404.858
Recreation 6.3% 113.232
Education/Communication 6.4% 132.508
Other (tobacco, personal care items, etc.) 3.5% 390.761
All Items 100% 226.230
*Weights established as of December 2010.

 

Housing is, by far, the largest expenditure component - weighted almost 42 percent of the total basket value. Source: Consumer Price Index for all Urban Consumers: U.S. City Average, by Expenditure Category and Commodity and Service Group

[Teacher Note: Students may be interested in determining their own "weighted index." What percent of their monthly expenses go to different spending categories? Are their "weights" similar to the BLS CPI-U market basket weights?]

The chart in Figure 3 shows the monthly changes in the CPI-U from January 2002 through November 2011. Notice the irregular upward and downward spikes in CPI changes. In the period of 2002 to mid-2005, consumer prices were relatively stable compared to the mid-2005 to 2009 period of time. Many of the CPI spikes can be attributed to more volatile crude oil prices. Factoring out more volatile energy and food prices (the core index) provides a graph with fewer and less pronounced spikes.

figure 3

Inflation Calculator

You can use the BLS "Inflation Calculator" to determine price level change over any period of time (beginning in 1913) or to determine the buying power of the dollar at any given time compared to another. For instance, $100 in 1913 had the same relative “buying power” as $2,262 in November, 2011. A good that cost $100 in 1913 (all other things being equal) would cost $2,262 today. If electronics prices had been consistent with the CPI-U over time an I-Pod that cost $200 today would have cost just $115.55 in 1990 (if you could have bought an I-Pod in 1990).

Try the CPI Inflation Calculator to determine the historical price of something you might buy today.  Remember, prices of all expenditure categories have not changed at the same rate. Any calculation you make with the calculator is based on the changes in the "CPI-U for all Items."

[Teacher Note: Students should be able to calculate the CPI for the year they were born.]

Anticipating Inflation

When the rate of inflation can be predicted or is consistent over time, planners can better predict future prices and make more informed investments. Higher (or lower) costs can be factored into investment and consumption decisions.

What results when prices unexpectedly change? Uncertainty results. Planners, businesses and others agree to contracts and investments based on expected returns - including some premium for anticipated inflation. Unanticipated inflation hurts lenders and helps borrowers. When borrowers or lenders are uncertain, they may choose not to act - not to invest - not to borrow.

In August to December, 2008, there were some fears of long-term deflation - a falling price level. Falling prices can have a similar deterring effect on business investors. Some feared a downward price spiral. When producers anticipate falling product prices, they are normally less willing to supply or invest in future output. This idles some of the nation's productive capacity. As investment also falls, it leads to further decrease in aggregate demand. The spiral continues.

It looks like the economy is finally turning around. Real GDP is growing.  With little threat of inflation, planning is easier and private investments can be made with a little more certainty.  Again, high energy and food prices can derail the recovery.

BLS December 16, 2011 CPI Summary Tables

[Teacher Note: Assign small groups of students different categories of spending.  Can they see any specific products in their category that increased or decreased in price more or less than the average.  Can they suggest any factors that may influence those prices?]

ASSESSMENT ACTIVITY


Essay Question:

1.  How is the rate of inflation, as the percentage change in CPI from one period to the next, determined?

[Subtract the CPI in the base period from the current measurement of CPI. Divide the difference by the CPI base year measurement to determine the percentage change.

CPI Year 1 = 100
CPI Year 2 = 105
105 minus 100 = 5
5 divided by 100 = .05 or 5 percent]

CONCLUSION

There was no significant change in the general price level (CPI-U) from October to November, 2011, thanks largely to a monthly decrease in energy prices that offset some small increases in other categories.

November was a good example of how the greater volatility of energy prices can impact the overall (all items) CPI measurement.  Energy prices increased in earlier months of 2011, resulting in an increase of over 12 percent for the past 12 months, despite the recent lower prices.

Take a look at the average gasoline prices in the first eleven months of 2011.   You will see a steady monthly increase from January through May and a steady monthly decrease from June to November.

Gasoline Price Index
Average Price
All Types, U.S. City Average 2011
(Average price per gallon)
January $3.139
February $3.215
March $3.594
April $3.863
May $3.982
June $3.753
July $3.703
August $3.680
September $3.664
October $3.521
November $3.475

 

Take another look at the price level changes by spending category to see which goods and services followed the trend - steady prices - and those that increased or decreased more than the average. http://www.bls.gov/news.release/cpi.t01.htm

EXTENSION ACTIVITY

Producer Price Index

The BLS also tracks and reports on producer prices, reported as the Producer Price Index (PPI). According to the BLS, "The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services. "The PPI includes measurements of "crude" goods and "intermediate" goods. The PPI for Finished Goods tracks the average change in prices over time of domestically produced and consumed commodities. The index is comprised of prices for both consumer goods and capital equipment, but excludes the prices of services.

The May 12, 2011 BLS announcement of the PPI for the month of April 2011 reported, "The Producer Price Index for finished goods rose 0.8 percent in April, seasonally adjusted. This advance followed increases of 0.7 percent in March and 1.6 percent in February. Prices for finished goods less foods and energy moved up 0.3 percent."

Go to the BLS Producer Price Index Web page.

Which measurement, CPI or PPI, do you think give us more meaningful information about price stability in the economy?

Opportunities for High School Graduates

On April 8, 2011, the BLS released a report on "College Enrollment and Work Activity of 2010 High School Graduates College Enrollment and Work Activity of 2009 High School Graduates " Take a look at this interesting data. Remember, those who graduated in 2010 left school during the economic recovery, but while the unemployment rate was still very high.  Will future graduates have more opportunities than in past years?

"In October 2010, 68.1 percent of 2010 high school graduates were enrolled in colleges or universities, the U.S. Bureau of Labor Statistics reported today. Recent high school graduates not enrolled in college in October 2010 were more likely than enrolled graduates to be working or looking for work (76.6 percent compared with 40.0 percent)."