This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported February 20, 2009, by the U.S. Bureau of Labor Statistics (BLS) for the month of January, 2009. Students 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.

KEY CONCEPTS

Causes of Inflation, Inflation, Macroeconomic Indicators, Price, Trade-offs among Goals

STUDENTS WILL

  • Identify the current rate 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 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.

U.S. Bureau of Labor Statistics Announcement, February 20, 2009, Consumer Price Index: January 2009

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The January level of 211.143 (1982-84=100) was virtually unchanged from January 2008."

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


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

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

During the second half of this school year (January-May), EconEdLink will publish five 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.

  • January: CPI and inflation (deflation) basics: What is the CPI? What is inflation and deflation? How are they measured? What do they mean?
  • February: 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).
  • April: The relationships of CPI and inflation data to other economic data, such as GDP, employment. etc. and the business cycle.
  • May: School year-end review and analysis.]

MATERIALS

  • BLS February 20,2009 Release of CPI Data:  This release gives Consumer Price Index data from January 2009.
    www.bls.gov/news.release/archives/cpi_02202009.htm
     
  • How the Government Measures Unemployment:  This BLS publication discusses the process used to measure U.S. unemployment.
    www.bls.gov/cps/cps_htgm.htm
     
  • Frequently Asked Questions About the CPI:  This site answers FAQ's for those trying to read CPI releases.
    www.bls.gov/cpi/cpifaq.htm
     
  • Inflation Calculator:  This calculator allows users to compare price changes over time due to inflation.
    http://data.bls.gov/cgi-bin/cpicalc.pl
     
  • The Economy at a Glance: This BLS page provides current U.S. Economic Indicators.
    www.bls.gov/eag/eag.us.htm
     
  • BLS News Service Subscription Page:  The reader can subscribe to receive monthly BLS email news releases.
    www.bls.gov/bls/list.htm
     
  • EconomicIndicators.gov:  This site provides the latest updates on U.S. economic indicators.
    www.economicindicators.gov/
     
  • BLS Economic Indicators:  This site provides the latest updates on U.S. economic indicators.
    www.bls.gov/bls/newsrels.htm#major/
     
  • BEA Economic Indicators:  This site provides the latest updates on U.S. economic indicators.
    www.bea.gov/
     
  • How to Use the Consumer Price Index for Escalation:  This page is an online fact sheet explaining how to use the CPI for escalating contracts.
    www.bls.gov/cpi/cpi1998d.htm
     
  • The Consumer Price Index —Why the Published Averages Don't Always Match An Individual's Inflation Experience:  This page explains that the CPI is an average, and may not reflect an individuals own experience with inflation.
    www.bls.gov/cpi/cpifact5.htm
     
  • How BLS Measures Changes in Consumer Prices:  This page provides an explanation as to how consumer price changes are tracked.
    www.bls.gov/cpi/cpifact2.htm
     
  • Resources for Student or Teacher:  This BLS site provides resources for homework and course planning.
    www.bls.gov/audience/students.htm
     
  • Assessment Activity:  This interactive quiz tests students' understanding of the CPI lesson.
    Click Here
     
  • How BLS Measures Price Change for College Tuition and Fees in the Consumer Price Index:  This site is one example of how price level changes are measured for different sectors and specific product groups by the BLS.
    www.bls.gov/cpi/cpifacct.htm

Key Economic Indicators

as of February 6, 2009

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January, before seasonal adjustment. The January level of 211.143 was virtually unchanged from January 2008. (February 20, 2009)

Employment and Unemployment

Nonfarm payroll employment decreased by 598,000 in January and the unemployment rate rose from 7.2 to 7.6 percent. (February 6, 2009)

Real GDP

Real gross domestic product decreased at an annual rate of 3.8 percent in the fourth quarter of 2008. In the third quarter, real GDP decreased 0.5 percent. (January 30, 2009)

Federal Reserve

At its January 28, 2009 meeting, the Federal Open Market Committee decided to keep its target range for the federal funds rate at 0 to 1/4 percent.(January 28, 2009)

PROCESS

The Consumer Price Index (CPI) is a measure of the average change over time in the prices of consumer items - goods and services that people buy for day-to-day living. The CPI’s surveys rely on the voluntary cooperation of many people and establishments throughout the country who, without compulsion or compensation, supply data to the government’s data collection staff.

The Bureau of Labor Statistics announcement, February 20, 2009

CONSUMER PRICE INDEX: JANUARY 2009

  • CPI-U

    "The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The January level of 211.143 (1982-84=100) was virtually unchanged from January 2008."

    What is the CPI for All Urban Consumers?

    The all urban consumer group represents 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. The CPI for All Urban Consumers (CPI-U) is the index most often reported by the national media.
  • CPI-W

    "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 0.4 percent in January, prior to seasonal adjustment. The January level of 205.700 (1982-84=100) was 0.5 percent lower than in January 2008."

    What is the CPI for Urban Wage Earners and Clerical Workers?

    The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is based on the expenditures of households included in the CPI-U definition that also meet two requirements: more than one-half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. The CPI-W population represents about 32 percent of the total U.S. population and is a subset, or part, of the CPI-U population. The CPI for Urban Wage Earners and Clerical Workers (CPI-W) is the index most often used for wage escalation agreements.

    The CPI inflation calculator allows customers to calculate the value of current dollars in an earlier period, or to calculate the current value of dollar amounts from years ago.

    Consumer price indexes often are used to escalate or adjust payments for rents, wages, alimony, child support and other obligations that may be affected by changes in the cost of living. There is a fact sheet explaining how to use the CPI for escalating contracts.
  • C-CPI-U

    "The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 0.5 percent in January on a not seasonally adjusted basis. The January level of 121.208 (December 1999=100) was 0.5 percent lower than in January 2008."

    What is the Chained CPI for All Urban Consumers?

    The C-CPI-U supplements the other two CPI indexes. The C-CPI-U is designed to more closely resemble a true "cost-of-living index" by taking into account observed consumer behavior, technological changes, and product substitutions. The C-CPI-U is chained monthly, using expenditure data to average price changes across item categories between a base period (1999, initially) and the current period. Data are national, not seasonally adjusted, and subject to revision.

    The CPI may not be applicable to all population groups. For example, the CPI-U is designed to measure inflation for the U.S. urban population and thus may not accurately reflect the experience of people living in rural areas. Also, the CPI does not produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly or the poor.

Here is the link to the full BLS February 20,2009 Release of CPI Data .

Recent History of the Consumer Price Index

After several year of moderate price level increases, the U.S. economy entered a brief period of price level declines in late 2008, with no changes in the CPI-U in August and September, a -0.8 percent change in October, a -1.7 percent change in November and a -0.8 percent change in December 2008. The 0.3 increase in January may have reversed the negative trend, but we will not know until we see the CPI figures over the next few months. Some economists had feared a period of "deflation" that would more negatively impact the economy. Some say a little inflation is, at least, a sign of some growth pressure.

Figure 1 show the monthly changes in the CPI-U from 2002 through January 2009. Note the erratic pattern of changes month to month. Many of the shifts from increase to decrease and decrease to increase reflect short-term changes in energy prices.

Inflation Graph

PPI

The Producer Price Indexes (PPIs) are a group of price indexes that measure changes in the selling prices received by domestic producers of goods and services. They formerly were referred to as Wholesale Price Indexes. When the PPIs are released, the news media will most often report the percentage change in the Index for Finished Goods.

The February 19, 2009, BLS announcement of the PPI began with this summary:

"The Producer Price Index for Finished Goods rose 0.8 percent in January, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This increase followed declines of 1.9 percent in December and 2.5 percent in November. At the earlier stages of processing, the decrease in prices for intermediate materials slowed to 0.7 percent from 4.2 percent in the prior month, and the index for crude materials declined 2.9 percent after dropping 5.3 percent in December."

"The upturn in the index for finished goods was led by the index for energy goods, which increased 3.7 percent after falling 9.1 percent in December. Price declines for finished consumer foods slowed to 0.4 percent in January from 1.4 percent in the preceding month. The index for finished goods less foods and energy increased 0.4 percent following a 0.2 percent rise a month earlier." 

The GDP Deflator

The GDP deflator (also called the implicit price deflator (IPD) is a measurement of inflation that tells how much the price of all goods and services included in GDP have increased. GDP includes consumer goods and services and also machinery and equipment bought by firms, purchases of goods and services by government, and the impact of exports and imports. The "deflator" is the ratio of the current-dollar value of a series, such as gross domestic product (GDP), to its corresponding chained-dollar value, multiplied by 100. In other words, the GDP figures are adjusted for inflation using the deflator.

The Bureau of Economic Analysis uses the raw data on production to estimate nominal GDP (GDP in current dollars). The BEA then adjusts the data for inflation to arrive at "real GDP." 

The CPI, Inflation and the Cost of Living

A BLS online publication, "Frequently Asked Questions," explains the relationship of the CPI to inflation and the cost of living.

Link to the Frequently Asked Questions About the CPI .

"The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies."

"The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, and not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework."

[Note to teachers: The "Virtual Economics" CD includes a basic explanation of "inflation" through a video clip. If you have a copy of "Virtual Economics," open the "Browse Economics Concepts" section and click on the key word "inflation" in the macroeconomics section.]

The "Core" Rate of Inflation and the "Headline" Rate

"The core rate of inflation, the index for all items less food and energy, rose 0.2 percent in January, following virtually no change in December. The CPI for all items rose 0.3 percent in January." The 'core' measurement represents changes in the consumer price index minus items which typically fluctuate widely from month to month - food and energy.

Extra attention is given by forecasters to the core index as it tends to show more lasting trends in prices. The rates of change in the core index were higher in the early part of the year and that did cause concern about the trend in inflation. The concern was that the increase in energy prices over the last several years may have started to influence rates of increases in all other prices. While that concern still exists, core prices are increasing at relatively slower rates.

The "headline" rate - the rate reported in the media includes energy and food. Adding the more volatile energy and food prices often shows greater rates of change. In some cases, a drop in energy prices added to inflation in other categories will end up showing a net "no change." The headline rate in January included the following energy and food price data.

"The energy index climbed 1.7 percent in January, its first increase in six months, but it was still 31.4 percent below its July 2008 peak level. Within energy, the gasoline index rose 6.0 percent in January after a 19.3 percent decline in December."

"The food index, which rose sharply during the summer and moderated through the fall, increased 0.1 percent in January after being virtually unchanged in December. The food index has risen 5.3 percent over the past year. The food at home index declined 0.1 percent in January as the fruits and vegetables index continued to fall.

The January CPI by Expenditure Category

  • Housing: The housing index was virtually unchanged in January for the second straight month. However the shelter index, virtually unchanged in December, rose 0.2 percent in January. Over the last 12 months, the housing index has risen 2.2 percent and the index for shelter was up 1.8 percent.
     
  • Transportation: The transportation index rose for the first time since July, increasing 1.3 percent in January. The index has declined 12.6 percent over the past 12 months. The index for motor fuel, which had been declining in recent months, rose 5.3 percent in January. However, the motor fuel index is still 48.1 percent below its peak in July.
     
  • Apparel: After declining 0.6 percent in December, the apparel index turned up in January, rising 0.3 percent. The index for men's and boys' apparel rose 1.6 percent and the index for women's and girls' apparel rose 0.2 percent.
     
  • Medical Care: The medical care index climbed 0.4 percent in January following a 0.2 percent increase in November and a 0.3 percent advance in December.
     
  • Recreation: The index for recreation, down 0.2 percent in December, was virtually unchanged in January. The indexes for photography, toys, admissions, and for pets, pet products, and services all rose in January.
     
  • Education and Communication: The education and communication index increased 0.3 percent in January and was up 3.6 percent over the past year. The education index, which rose 0.5 percent in December, advanced 0.3 percent in January. The index for communication climbed 0.2 percent for the second straight month.
     
  • Other: After being virtually unchanged in December, the index for other goods and services rose 0.3 percent in January and was up 3.3 percent over the past 12 months.

Figure 2 summarizes the CPI changes for the various spending categories in January 2009.

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Figure 2

Percent Changes in CPI for All Urban Consumers

(CPI-U

(Seasonally Adjusted)

Expenditure Category

CPI Change

 

CPI All Items

0.3

Food and Beverages

0

Housing

0

Apparel

0.6

Transportation

1.5

Medical Care

0.4

Recreation

0

Education and Communication

0.3

Other Goods and Services

0.4

Special Indexes:

Energy

1.0

Food

0

All Items Less Food and Energy

0.2

You Can Calculate Inflation Over a Period of Time

The CPI inflation calculator allows customers to calculate the value of current dollars in an earlier period, or to calculate the current value of dollar amounts from years ago. The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households. This index value has been calculated every year since 1913. For the current year, the latest monthly index value is used.

Link to the CPI Inflation Calculator .

Consumer price indexes often are used to escalate or adjust payments for rents, wages, alimony, child support and other obligations that may be affected by changes in the cost of living. Escalation agreements often use the CPI—the most widely used measure of price change—to adjust payments for changes in prices. The most frequently used escalation applications are in private sector collective bargaining agreements, rental contracts, insurance policies with automatic inflation protection, and alimony and child support payments.

Here is a link to an online fact sheet explaining How to Use the Consumer Price Index for Escalation .

Open the calculator and put in the time period since your year of birth to today. How much inflation have we experienced in your lifetime? If your parents bought a new car for $15,000 the year you were born, what would that car cost in today's dollars?

The BLS has published an online reading, "The Consumer Price Index —Why the Published Averages Don't Always Match An Individual's Inflation Experience ." This may answer some of your questions about your expereinces with price level changes.

Additional Information about the CPI: 

ASSESSMENT ACTIVITY

 

Essay Question:

  1. How does inflation impact your life? [Answers will vary. Students should be able to connect their spending patterns to price level changes. One common comment should be about gasoline prices over the past year. Students may also commonly comment on changes in the prices of apparel and entertainment. They should use the terminology of the CPI (as found in this lesson) accurately.]

CONCLUSION

U.S. Bureau of Labor Statistics reported that in January 2009, "The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January, before seasonal adjustment, and "The January level of 211.143 (1982-84=100) was virtually unchanged from January 2008." The recent short trend of price level decreases has reversed, despite a recent increases in energy prices. Overall, the price level, as measured by the CPI-U, was essentially the same in January 2009 as it was in January 2008.

Volatile energy and food prices over the past year have made the impact of the overall price level more difficult to understand. Much depends on your lifestyle and spending.

If you do not purchase gasoline, fuel oil, or natural gas, your experience with inflation in the past year is different from the experience of a homeowner in the suburbs who drives 20 miles to work each day.

If you do not purchase food, you may not have noticed the changes in commodity and food prices. Someone who shops for food every day or week will notice frequent changes for individual items and not be able to keep track of the overall price level change reflected in the CPI.

EXTENSION ACTIVITY

The BLS provide more detailed information about how price level changes are measured for different sectors and specific product groups.

One that may be of interest to students is the BLS online publication, "How BLS Measures Price Change for College Tuition and Fees in the Consumer Price Index ."