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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported May 13, 2011, by the U.S. Bureau of Labor Statistics (BLS) for the month of April, 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 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 November 10, 2014

Inflation

The Consumer Price Index for All Urban Consumers increased 0.1 percent in October on a seasonally adjusted basis. The core inflation rate increased the same amount. For the previous 12 months, the index increased 1.7%, the same rate as reported in the September report.

Employment and Unemployment

According to the October report of the Bureau of Labor Statistics, the unemployment rate fell from 5.9% to 5.8%, and the number of individuals unemployed also decreased. Total nonfarm employment rose by 214,000 in October. Employment gains were concentrated in retail trade, food services and health care.

Real GDP

The advance estimate for real GDP growth in the third quarter of 2014 was 3.5%, a decrease from the revised second quarter growth of 4.6%. Inventory investment reduced third quarter growth, while it added to second quarter growth. In addition, consumer spending increased at a lower rate in the third quarter, compared to the second. Finally, business investment increased in the third quarter, but at a lower rate than in the second quarter.

Federal Reserve

The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.

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 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 May 13, 2011, BLS press release of data on the consumer price index for the month of April, 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 second semester of this school year (January-May, 2011), 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: End of year price level summary and potential issues. THIS LESSON]

RESOURCES

  • BLS "Focus on Spending and Prices":  These quarterly reports highlight recent trends in inflation and spending in the U.S. economy.
    www.bls.gov/opub/focus/

Key Economic Indicators

as of May 13, 2011

Inflation

On a seasonally adjusted basis, the CPI-U increased 0.4 percent in April after rising 0.5 percent in March. The index for all items less food and energy rose 0.2 percent in April after increasing 0.1 percent in March.

Employment and Unemployment

U.S. nonfarm payroll employment rose by 244,000 in April, and the unemployment rate edged up to 9.0 percent. Job gains occurred in several service-providing industries, manufacturing, and mining

Real GDP

U.S. real gross domestic product increased at an annual rate of 1.8 percent in the first quarter of 2011 (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 3.1 percent.

Federal Reserve

The FOMC will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

PROCESS

The U.S. consumer price index increased by just 0.4 percent from March to April, 2011, extending a streak of what seem like modest monthly increases in the price level, but adding to an annual rate over the last twelve months equaling 3.2 percent.  This was the largest twelve month increase since October, 2008.  During the recession the price level remained very stable, decreasing by a total of 0.4 percent in the twelve months of 2009.

Has "inflation" returned as a threat to the economy and consumers?  Take a look at the details of the BLS report on the CPI for the month of April, 2011, and decide for yourself.

Consumer Price Index: April 2011
U.S. Bureau of Labor Statistics
Released: May 13, 2011

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment."

Was It All About Energy and Food Prices?

"The energy index posted another increase in April as the gasoline index continued to rise, the latter accounting for almost half of the seasonally adjusted all items increase. The household energy index also rose, with all of its major components posting increases. The food index increased as well in April, though the 0.5 percent rise in the food at home index was the smallest increase this year. Within the food at home component, the indexes for meats, poultry, fish, and eggs, for dairy and related products, and for nonalcoholic beverages all posted notable increases, though the fresh vegetables index did decline following recent advances."

The "Core" CPI Less Food and Energy

"The index for all items less food and energy rose 0.2 percent in April, the third increase of that size in the last four months."

"Indexes making major contributions to that increase included those for new vehicles, used cars and trucks, medical care, and shelter."

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?]

The 12-Month Change in the Price Level

"The 12-month increases of major indexes continue to climb. The all items index rose 3.2 percent for the 12 months ending April 2011, the highest figure since October 2008. The energy index has now risen 19.0 percent over the last 12 months, with the gasoline index up 33.1 percent. The food index has risen 3.2 percent while the index for all items less food and energy has increased 1.3 percent; both figures represent increases over recent months."

The April CPI change, like that of several preceding months was largely driven by energy prices, with help from food price increases.  It seems like those produces we purchase more often, such as gasoline and food, have increased much more than the average.

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 March to April 2011 and the one-year change from April 2010 to April 2011. Note the very large increases in energy prices over the past year. 

Without factoring in energy prices, have we experienced significant inflation?

[Teacher Note: Ask your students if they have notice any recent signs of inflation - other than gasoline prices.]

Figure 1:  Percent Changes in CPI for All Urban Consumers
CPI-U
U.S. City Average
Category % Change
April 2010
% Change
April 2009 to
April 2010
CPI-U All Items  0.4  3.2
  Food  0.4 3.2
     Food at home  0.5  3.9
     Food away from home  0.3  2.1
  Energy  2.2  19.0
     Energy commodities  3.1  32.7
       Gasoline (all types)  3.3  33.1
       Fuel oil*  3.2  34.1
     Energy services  0.6  0.1
       Electricity  0.2  0.6
       Utility (piped) gas service  1.9  -1.5
  All items less food and energy  0.2  1.3
     Commodities less food and energy  0.4  0.7
       New vehicles  0.7  2.4
       Used cars and trucks  1.2  3.3
       Apparel  0.2  0.1
       Medical care commodities*  0.5  3.1
    Services less food and energy  0.1  1.6
       Shelter  0.1  1.0
       Transportation services  0.2  3.6
       Medical care services  0.3  2.8
*Not seasonally adjusted.

 
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 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 index number of the CPI-U is 224.906. That means that the market basket of goods and services that cost $100 in 1982-84 now costs slightly under $225. The basket cost $223.467 in March, 2011 and increased by about $1.44 in the last month. The cost of the market basket increased $6.90 between April, 2010, and April, 2011.

Figure 2, below, shows the major spending categories of the CPI-U in April, 2011. Each category is given a "weight," representing the estimated portion of the total market basket spent on that category. 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 Category
April 2011
Spending Category Weight* Index Level
 Food and beverage 14.8% 224.906 
 Housing  41.40%  217.901
 Apparel  3.6%  122.226
 Transportation  17.3%  516.867
 Medical Care  6.6%  398.813
 Recreation  6.3%  113.368
 Education/Communication  6.4%  130.643
 Other (tobacco, personal care items, etc.)  3.5%  386.226
 All Items  100%  224.906
*Weights established as of December 2010.


Housing is, by far, the largest expenditure component - weighted 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 April 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 “buying power” as $2,271.78 in April 2011. A good that cost $100 in 1913 (all other things being equal) would cost $2,271.78 today. If electronics prices had been consistent with the CPI-U over time an I-Pod that cost $200 today would have cost just $58.11 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 again.  With little threat of inflation, planning is easier and private investments can be made with a little more certainty.  Again, high energy and food price can derail the recovery.

[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

Fears of inflation have resurfaced for some people, given the recent increases in energy prices. Low to moderate inflation in recent years has influenced the Federal Reserve to enact stimulatory monetary policies - historically low federal funds rates - without fear of rising prices. Perhaps, this is an important part of the economic stability we seek as we act to help the economic recover and create jobs.

  • What do you think will happen over the rest of 2011?
     
  • Higher or lower prices?
     
  • A double-dip or continued recovery?
     
  • More or less unemployment?

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 2011 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)."