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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation for the month of August, 2012, as reported by the U.S. Bureau of Labor Statistics (BLS) on September 14, 2012. 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

Consumer Price Index (CPI), Inflation, Macroeconomic Indicators, Price Stability

STUDENTS WILL

  • Identify the level and rate of change in the consumer price index and rate of inflation in the United States in August, 2012.
  • 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 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 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 September 14, 2012, BLS press release of data on the consumer price index for the month of August, 2012.

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

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

[Note on the CPI and Inflation "Focus on Economic Data" LessonsDuring the first semester of this school year (August-December, 2012), 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 August and progressively focus on more complex data, issues, and comparisons. All monthly lessons will include the current data and significant recent changes.

  • July: CPI and inflation (deflation) basics: What is the CPI? What is inflation and deflation? How are they measured? What do they mean?
  • August: More details and issues about the measurements and meaning of the measurements of the price level, adding additional concepts. (THIS LESSON)
  • September: U.S. regional and global price level and inflation comparisons.
  • October: 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.
  • November: Year end summary.]

RESOURCES

Key Economic Indicators

as of September 14, 2012

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.6 percent in August after being unchanged in July. The index for all items less food and energy rose 0.1 percent in August, the same increase as in July.

Employment and Unemployment

Total nonfarm payroll employment rose by 96,000 in August, and the unemployment rate edged down to 8.1 percent. Employment increased in food services and drinking places, professional and technical services, and health care.

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 1.7 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 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 economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

PROCESS

According to the web site InflationData.com, the U.S. economy has experienced an average annual rate of inflation of 3.24 percent since 1913, as measured by the consumer price index. That means, on average, a good or service that cost $1 in 1914 cost about $23.04 in August, 2012 – a compound inflation of over 2000 percent over 98 years.  [Source: http://inflationdata.com/Inflation/Inflation/DecadeInflation.asp. InflationData.com uses BLS CPI-U data.]

If you look at a graph of the CPI since 1913, you will see a trend line around an average 3.24 percent change.  The CPI grew at a slower pace until the 1970s and has accelerated since that time. The BLS provides a tool to graph any period of the CPI since 1913. http://data.bls.gov/pdq/SurveyOutputServlet

[Teacher Note: To illustrate a "trend line" hold a strait edge across the graph (Figure 1) so that it generally follows the averages over time.  In this case, the trend line will not be at approximately 3.24, because the time period is a shorter period than the 1913-2012 average.]

On September 14, 2012, the BLS announced: "The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment."

U.S. inflation during the past year has been about half of the annual average for the past 98 years, at 1.7 percent (August, 2011, to August, 2012.)  This happened after an extended economic slowdown following the most severe recession since the Great Depression of the 1930s and recent period of renewed economic growth  Some say that a little inflation will be a sign of recovery.

[Teacher Note: Ask your students: Does an inflation rate of 1.7 percent over a year seem bad or good?  Have you noticed price increases in the past year? It might be interesting for the students to guess which product prices have increased and which have decreased in the past year.  See the CPI data by product: http://www.bls.gov/cpi/cpid1109.pdf . Relative to this lesson, students most likely will mention the significant increase in gasoline prices in August.]

Figure 1, below, shows the monthly rates of change in the CPI-U since 2002.  Note the periodic ups and downs.  Remember, the trend line over time has been just over 3 percent.  The most recent period has been generally below that line.

figure 1

Figure 2, below, shows the average rates of inflation (CPI-U) for each decade since 1913.  Again, note the ups and downs over time, and an average of just over 3 percent since 1913.

figure 2

To better understand the recent changes in the U.S. price level, take a look at the most recent BLS consumer price index announcement. 
 

U.S. Bureau of Labor Statistics: Consumer Price Index - August 2012

Released September 14, 2012

"On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.6 percent in August after being unchanged in July. The index for all items less food and energy rose 0.1 percent in August, the same increase as in July."

Note: Unless otherwise cited, quoted materials in this lesson are from the Bureau of Labor Statistics, February 17, 2012, "Consumer Price Index - January 2012" announcement.

The Impact of Food and Energy Prices

In recent years, the BLS has focused attention on energy and food prices in its monthly CPI-U announcements.  Energy and food prices tend to be more volatile than other prices.  The CPI-U less food and energy is the "core" CPI.

August, 2012, is a great example of the potential impact of energy prices on the CPI.  Excluding energy and food, the CPI rose just 0.1 percent.  Including energy and food, the CPI rose 0.6 percent.  If that same monthly increase continued for a year, the annual rate of increase would be over 7 percent.

"The seasonally adjusted increase in the all items index was the largest since June 2009. About 80 percent of the increase was accounted for by the gasoline index, which rose 9.0 percent and was the major factor in the energy index rising sharply in August after declining in each of the four previous months."

The "Core" CPI-U in August 2012

"The index for all items less food and energy rose 0.1 percent for the second month in a row. The indexes for shelter, medical care, personal care, new vehicles, and recreation all rose in August. These increases more than offset declines in the indexes for used cars and trucks, apparel, household furnishings and operations, and airline fares."

Changes in the CPI - August 2011 to August 2012

"The 12-month change in the index for all items was 1.7 percent in August, an increase from the July figure of 1.4 percent. The index for all items less food and energy rose 1.9 percent for the 12 months ending August, a slight decline from the 2.1 percent figure in July and its smallest increase since July 2011."

For the details of the August, 2012, CPI-U data, including comments on the effect of energy and food prices, see the BLS announcement, http://www.bls.gov/news.release/cpi.nr0.htmhttp://www.bls.gov/news.release/cpi.nr0.htm Economic News Release

[Note to teachers:  For more information about the "core" rate of inflation, see the BLS Frequently Asked Questions" page .  Students can discuss the pros and cons of the reported CPI-U and the "core" rate as reliable measures of inflation.]

[Note to teachers: Have your students noticed changes in food prices - either in grocery stores or restaurants?  It may be interesting to look at the history of prices in this category.  See the announcement Table 2 .]

Take a look at the prices level changes in August, 2012, for the major spending categories.  Figure 3, below, shows the "Percent Change in the CPI, All Urban Consumers, U.S. City Average, August 2012."  Note the spending categories that increased and decreased in January.

figure 3

Consumer Price Index for All Urban Consumers (CPI-U)

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.

The Level of the CPI-U

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.7 percent over the last 12 months to an index level of 230.379 (1982-84=100). For the month, the index increased 0.6 percent prior to seasonal adjustment."

The market basket of goods and services that cost an urban consumer $226.55 in August, 2011, cost $230.38 in August, 2012.  Remember, this CPI-U data is based on a base period of 1982-84.  That same market basket cost just $100 in 1982-84.  Take a look at the history of the level of the CPI-U at this BLS webpage: http://data.bls.gov/cgi-bin/surveymost

[Teacher Note:  Ask your students: Is a price increase of $3.83 in a year  for the "market basket" significant?] 

Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)

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 BLS reported the CPI-W for January as: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.7 percent over the last 12 months to an index level of 227.056 (1982-84=100). For the month, the index increased 0.7 percent prior to seasonal adjustment."

Prices for "wage earners and clerical workers" rose slightly more in August than prices for all urban consumers.  

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. The BLS has published a fact sheet explaining how to use the CPI for escalating (negotiating) employment contracts.

The CPI may not be an appropriate measure of inflation for 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.

The CPI, Inflation and the Cost of Living

A BLS online publication, "Frequently Asked Questions: Is the CPI a Cost-of-Living Index? ," explains the relationship of the CPI to inflation and the cost of living.

"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."

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 most often 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."

[Note to teachers:   Ask your students which of the two, the headline rate or the core rate, is the more meaningful measure of inflation.]

Calculating the Rate of 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.

[Teacher Note: Students can select a time period and determine the rate of inflation over that period.  They can also research to find events or forces that impacted the price level during that period.]

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 experiences with price level changes.

Looking Back in CPI History

win picture

In 1973 and 1974, the United States was experiencing inflation averaging about one percent per month. U.S. consumers lost over 10 percent of their purchasing power in just one year. On October 8, 1974, President Gerald R. Ford, in a speech to Congress, announced the “Whip Inflation Now” program.

President Ford proposed a variety of grass-roots strategies to reduce the impact of inflation. He encouraged people to increase their savings and reduce spending, along public measures, such as higher taxes and reduced government spending. He encouraged  people to join the effort by wearing "WIN" buttons. Though the rate of inflation slowed somewhat for a couple of years, it reached even higher levels in 1979 and 1980.

[Note to Teachers: Your students may not remember a time in their lives when prices were significantly increasing (except maybe the price of gasoline).  Ask them how they think they would react to higher prices for the things they buy?  They may want to think about how they would respond.]

CONCLUSION

Over the past year, the U.S. economy has experienced an annual rate of inflation of 1.7 percent.  That is about half of the average annual rate of 3.24 percent since 1913.  A good or service that cost $1 in 1913 cost about $23 August, 2012.  Though the annual average inflation is 3.24 percent, the inflation rate has ranged from a high inflation rate of 20.0 percent in 1918 to a low rate of -10.8 percent (deflation) in 1921.  Over the past 20 years, the high has been an increase of 4.2 percent in 1991 and a low rate of minus 0.4 percent (deflation) in 2009.

Overall, U.S. prices have been relatively stable in recent times, with energy prices largely determining monthly changes and the annual trends.  The price of gasoline has ranged from a ten-year low of $1.20 per gallon in December, 2001, to a high of $4.14 in July, 2008.  The August CPI data shows the impact of energy price changes on the overall price level.

The rationale for using the "core" index is that it does not include energy and food prices that tend to fluctuate far more than other prices.

Keep an eye on energy prices as you look for signs of future inflation.

ASSESSMENT ACTIVITY

Click on the start button below to complete the interactive quiz about the August, 2012, BLS "Consumer Price Index" announcement. 

EXTENSION ACTIVITY

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

One resource 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."

Take a look at the reading. Link: www.bls.gov/cpi/cpifacct.htm

How might the prospect of inflation impact your post-high school plans - working or more education?