This lesson focuses on the Consumer Price Index (CPI) and rate of inflation for the month of September, 2012, reported by the U.S. Bureau of Labor Statistics on October 16, 2012. Students will read the BLS report, analyze the meaning of the CPI data, determine the change in consumer prices, and explore the impact of the change in the price level on themselves, their families, consumers, and producers.
- Identify the rate and change in the consumer price index and rate of inflation in the United States for the month of September, 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, the core rate, and other measures of inflation.
Current Key Economic Indicatorsas of February 6, 2015
The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.4% in December on a seasonally adjusted basis. The gasoline index fell 9.4% and was the main cause of the decrease in the seasonally adjusted all items index. The all items index increased 0.8% over the last 12 months, although the core inflation rate (less food and energy) did not change in December.
The unemployment rate rose to 5.7% in January of 2015, according to the Bureau of Labor Statistics release of Feb. 6, 2015. Total nonfarm employment rose by 257,000. Job gains were particularly strong in retail trade, construction, health care, financial activities, and manufacturing.This is the second month in a row that posted gains in construction and manufacturing.
Real GDP increased 2.6% in the fourth quarter of 2014, according to the advance estimate released by the Bureau of Economic Analysis. Consumer spending drove growth due to the reduction in gas prices, while a decrease in government expenditures was the most significant drag on growth. Third quarter growth was 5%.
In its January 28, 2015, statement, the FOMC cited the continued growth of the labor market, increased household and business spending, and below-target inflation as indicators of an economy that continues to recover. They expect below-target inflation to rise as oil prices and other "transitory" effects diminish. The statement reaffirmed the FOMC intention to keep the federal funds rate at its current low level. Notably, the FOMC added international variables to its list of factors to monitor for the timing of a rate increase.
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 October 16, 2012, BLS press release of data on the consumer price index for the month of September, 2012.
For the latest updates on U.S. economic indicators, go to:
- EconomicIndicators.gov: economicindicators.gov/
- BLS Economic Indicators: www.bls.gov/bls/newsrels.htm#major
- BEA Economic Indicators: www.bea.gov/newsreleases/glance.htm
[NOTE: You can subscribe to receive monthly BLS email news releases. To subscribe, go to the BLS News Service Subscription Page. www.bls.gov/bls/list.htm ]
[Note on the CPI and Inflation "Focus on Economic Data" Lessons: During the second 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 January and progressively focus on more complex data, issues, and comparisons. All monthly lessons will include the current data and significant recent changes.
- July 2012 (August 15, 2012): CPI and inflation (deflation) basics: What is the CPI? What is inflation and deflation? How are they measured? What do they mean?
- August 2012 (September 14, 2012): Details and issues about the measurements and meaning of the measurements of the price level, adding additional concepts.
- September 2012 (October 16, 2012): U.S. regional and global price level and inflation comparisons, with links to CPI data by region. THIS LESSON
- October 2012 (November 15, 2012): The relationships of CPI and inflation data to other economic data, such as GDP, employment. etc. and the business cycle.
- November 2012 (December 14, 2012): End of year price level summary and potential issues.]
- BLS release of CPI data: October 16, 2012, for the month of September, 2012. www.bls.gov/news.release/archives/cpi_10162012.htm
- "Markets and Prices," Virtual Economics video, Econ Ed Link "Virtual Economics." URL: www.econedlink.org/interactives/index.php?iid=216Economic News Release
BLS "Focus on Spending and Prices": These quarterly reports highlight recent trends in inflation and spending in the U.S. economy.
"The Consumer Price Index.": This article is from the BLS Handbook of Methods, Chapter 17. It talks in great depth about the CPI.
Frequently Asked Questions About the CPI: This site answers FAQ's for those trying to read CPI releases.
CPI Inflation Calculator: This calculator allows users to compare price changes over time due to inflation.
EconomicIndicators.gov: This site provides the latest updates on U.S. economic indicators.
[EEL-link id='2072' title='economicindicators.gov/' ]
BLS Economic Indicators: This site provides the latest updates on U.S. economic indicators.
[EEL-link id='2073' title='bls.gov/bls/newsrels.htm#major/' ]
Whose Buying Habits Does the CPI Reflect?: This page explains that the BLS measurement of the CPI-U includes all urban consumers, representing about 87 percent of the total U.S. population.
[EEL-link id='2255' title='bls.gov/cpi/cpifaq.htm#Question_3' ]
Consumer Price Index for all Urban Consumers: U.S. City Average, by Expenditure Category and Commodity and Service Group. This table explains the current level of the CPI-U.
BLS Feature: Focus on Prices and Spending- What Does the Producer Price Index Measure? The BLS breaks down the official definition of the Producer Price Index to clear up common misconceptions about prices, production, and price pass-though within the PPI.
[EEL-link id='3751' title='bls.gov/opub/focus/volume1_number9/ppi_1_9.htm#topics' ]
BLS, Frequently Asked Questions webpage
Frequently Asked Questions
Key Economic Indicatorsas of October 16, 2012
On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.6 percent in September, the same increase as in August. The index for all items less food and energy rose 0.1 percent in September, also the same increase as in August.
The unemployment rate decreased to 7.8 percent in September, and total nonfarm payroll employment rose by 114,000. Employment increased in health care and in transportation and warehousing but changed little in most other major industries.
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 1.3 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the 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.
Between August and September, 2012, most U.S. consumer prices remained fairly stable. Some prices went up a little more than others and a few went down. Energy prices led the overall price level increase, with gasoline up 7.0 percent in the one month period. The rise in the price of gasoline accounted for a large part of the overall September price level increase of 0.6 percent. The "core' consumer price index, less food and energy prices, rose only 0.1 percent in the month..
February was a very good example of how the volatility of energy prices can impact the overall upward or downward change in the price level. For the year, September, 2011, to September, 2012, gasoline prices increased 6.8 percent, while the overall CPI-U increased just 2.0 percent.
[Teacher Note: Ask your students: Have you noticed the changes in gasoline prices over the past few months? What has happened? (The U.S. city average gasoline prices (all types) have been $3.50 in July, 3.76 in August, and $391 in September. Prices have dropped significantly over the first three weeks of October. What is the average price in your area today?)]
Take a look at the latest BLS news release on consumer prices and inflation to better understand how these changes might affect your life and the economy.
Note: Unless otherwise cited, the quoted materials in this lesson are from the BLS announcement, "Consumer Price Index Summary," for the month of September, 2012, released October 16, 2012. URL: www.bls.gov/news.release/archives/cpi_10162012.htm
[Teacher Note: To introduce prices and inflation, show the Virtual Economics videos, "Markets and Prices" and "Inflation." www.econedlink.org/virtual-economics/.]
U.S. Bureau of Labor Statistics News Release
Consumer Price Index - September, 2012
Released October 16, 2012
"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.0 percent before seasonal adjustment."
Consumer prices increased at a faster rate in August and September, 2012, than in the past three years. The first seven months of 2012 saw essentially zero inflation as measured by the all-items CPI-U. Again, the primary reason for the overall increases in August and September was gasoline prices.
Figure 1, below, shows the monthly change in the CPI-U from 2002 to September, 2012. Note the erratic pattern of monthly changes over that time period. Note the time period of the recent recession, 2008-2009. In late 2008, the price level decreased in several months. The CPI-U also decreased in May, 2012.
[Teacher Note: Ask your students if they see any patterns over this time period. (More CPI growth from the early 2000s to 2008 - the year of the beginning of the recession. During the recession, December 2880 to June 2009, there was little or no inflation. During the recovery period, the primary driver of CPI change has been energy prices (gasoline).)]
The BLS announcement continued with reference to energy and food prices. "For the second month in a row, the substantial increase in the all items index was mostly the result of an increase in the gasoline index, which rose 7.0 percent in September after increasing 9.0 percent in August. The other major energy indexes increased in September as well."
You can take a look at the history of gasoline prices to put this comment in perspective. Go to this BLS table: data.bls.gov/pdq/SurveyOutputServlet;jsessionid=0D6AFF05B94C28D30681BFA2016B1AF9.tc_instance5
Gasoline prices (all types), increased 9 percent in August and 7 percent in September, 2012 after several months of moderate increases and decreases. This volatility is why some look at the "core" index as a better measurement of the real inflationary trend over a longer time period.
Next, the BLS announcement commented on the spending categories that canged significantly in September. "The food index increased 0.1 percent in September; the index for food at home was unchanged as major grocery store food indexes continue to be mixed. The index for all items less food and energy rose 0.1 percent for the third month in a row. Indexes for shelter, medical care, apparel, and airline fares were among those that increased, while the indexes for used cars and trucks, new vehicles, personal care, and household furnishings and operations all declined." Overall, there was very little change if you leave out energy and food prices.
Figure 2, below, shows the changes in price levels for the major CPI categories for the month of September, 2012, and for the twelve month period ending in September, 2012. Notice again that the only major increases were in some energy prices, especially gasoline.
[Teacher Note: Reinforce the difference between the "headline" number - the CPI for all items and the "core" rate, the CPI minus food and energy prices. Which is the better measure of the price level over time? Remind the students that if they spend a large portion of their income on gasoline and food, the impact of the price level change may hit them harder than others.]
Take a good look again at the price level data for the major spending categories of the CPI market basket in Figure 2. For more detailed price level data, go to Table 1 of the October 16, 2012, BLS news release: www.bls.gov/news.release/archives/cpi_10162012.htm Table 1. Consumer Price Index for All Urban Consumers (CPI-U) Do you see any patterns?
[Teacher Note: A good discussion for students may be to identify their personal consumer behaviors and wants that influence how they are affected by inflation. What happened to the prices of the goods and services students purchase most often?]
[Teacher Note: Ask: Who is affected the most by inflation? Possible answers: Those on a fixed income who cannot increase their income, lenders who are repaid with dollars that have lost purchasing power; people who are more dependent on fuel and food in their budgets.]
The Level of the CPI-U in September 2012
The nominal level of the CPI-U in September, 2012, was 231.407. That is an increase of 4.618 from the September, 2011, level of 226.889. Remember, the level of the CPI-U is relative to the base year level of 100. The base year for most of the CPI categories is the period of 1982-84. That means the market basket of goods and services originally cost $100 in 1983-84. That same market basket (after revisions for changes in consumer behaviors) cost $23.141 in September, 2011, and increased to $231.41 in September, 2012. The price of the basket increased $4.62 in one year - just over 2 percent.
[Teacher Note: Ask students if a $4.62 increase in the price level in one year seems like a lot. Assuming their income remained the same for that year, what would they have to give-up to adjust their spending for inflation? Or, what can $4.62 buy?]
How much inflation have we experienced since 1982-84? The CPI-U index has increased by 131.407 points, so the price level has increased by 131% in about 29 years. Simply put, it has increased by an average of about 3-4 percent per year.
Not Seasonally Adjusted CPI measures
The annual level of the CPI-U is not affected by seasonal changes that may occur from one season to another, so it is reported as “not seasonally adjusted.” The annual level is the index number.
"The Consumer Price Index for All Urban Consumers (CPI-U) increased 2.0 percent over the last 12 months to an index level of 231.407 (1982-84=100). For the month, the index increased 0.4 percent prior to seasonal adjustment."
"The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.0 percent over the last 12 months to an index level of 228.184 (1982-84=100). For the month, the index increased 0.5 percent prior to seasonal adjustment."
"The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 1.7 percent over the last 12 months. For the month, the index increased 0.4 percent on a not seasonally adjusted basis. Please note that the indexes for the post-2010 period are subject to revision."
The price level for “urban wage earners and clerical workers” increased slightly more than the CPI-U in September. For the past twelve months, the CPI-U and CPI-W have increased by about th esame amount, 2 percent. The “chained” index increased slightly less than the CPI-U. Revisit the definitions of these CPI measurements for a review of the differences. See the BLS FAQs: [EEL-link id='3690' title='bls.gov/cpi/cpifaq.htm#Question_2' ]
A BLS Note about Seasonal Adjustment
“Because price data are used for different purposes by different groups, the Bureau of Labor Statistics publishes seasonally adjusted as well as unadjusted changes each month. For analyzing general price trends in the economy, seasonally adjusted changes are usually preferred since they eliminate the effect of changes that normally occur at the same time and in about the same magnitude every year--such as price movements resulting from changing climatic conditions, production cycles, model changeovers, holidays, and sales.”
“The unadjusted data are of primary interest to consumers concerned about the prices they actually pay. Unadjusted data also are used extensively for escalation purposes. Many collective bargaining contract agreements and pension plans, for example, tie compensation changes to the Consumer Price Index before adjustment for seasonal variation.”
[Teacher Note: For more information seasonal adjustment, go to the CPI home page at www.bls.gov/cpi/ or contact the CPI Information and Analysis Section at (202) 691-7000.]
[Teacher Note: Ask students if they have noticed any prices that change with the seasons or relative to events or other factors. Ask how the unusually warm weather in the winter of 2012 may have impacted prices. Should they expect gasoline prices to increase during periods when people drive more and demand more gasoline?]
U.S. Regional Differences in Price Levels
The BLS also collects and reports consumer price levels and changes in four large regions of the United States, the states, and major metropolitan areas through its regional offices. Price levels will vary from statte to state and region to region for a variety of reasons.
The BLS regularly releases consumer price index data for each state and metropolitan areas in the states. To search for your state, go to: www.bls.gov/regions/home.htm and click on your state on the map. To search by region, go to: www.bls.gov/bls/regnhome.htm
Highlights of the September, 2012, Regional CPI Reports
- New England: Boston area consumer prices rose 1.3% over two months in September 2012.
- New York-New Jersey: A 4.4% jump in gas prices contributes to 0.4% rise in September New York CPI.
- Mid-Atlantic: 7.4% of West Virginia workers earned the Federal minimum wage or less in 2011.
- Southeast: Consumer prices in the South up 0.5% in September and 2.1% over the year.
- Midwest: Chicago area prices increased 0.3% in September and were 1.6% higher over the year.
- Southwest: Dallas area prices rise 1.3% during August and September; up 2.3% over the year.
- Mountain-Plains: CPI rose 0.3% in Sept led by 2.7% rise in motor fuel prices; up 1.9% over the year.
- West: Insurance benefits averaged 7.7% of total employee compensation costs in the West in June.
Regional Consumer Price Index Reports
Northeast Region – September, 2012
"Regional Prices Up 0.5 Percent Over the Month and 1.7 Percent Over the Year"
"The Consumer Price Index for All Urban Consumers (CPI-U) in the Northeast region rose 0.5 percent in September, the U.S. Bureau of Labor Statistics reported today. Deborah A. Brown, the Bureau’s regional commissioner, noted that the one-month increase was almost entirely due to advances in the energy index and all items less food and energy index, up 3.4 and 0.2 percent, respectively. The food index was nearly unchanged since August, inching up 0.1 percent."
Midwest Region – September 2012
"Prices in the Midwest up 0.3 percent in September and 1.9 percent higher over the year"
"The Consumer Price Index for All Urban Consumers (CPI-U) in the Midwest rose 0.3 percent in September, following a 0.7-percent advance in August the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Charlene Peiffer noted that higher prices for motor fuel, up 2.7 percent, had the greatest upward impact on the index. Overall, energy costs rose 1.6 percent over the month. Food prices edged down 0.1 percent and the index for all items less food and energy was 0.2 percent higher in September."
"The CPI-U for the Midwest rose 1.9 percent from September 2011 to September 2012. The energy index, which includes motor fuel and household fuels, was up 2.2 percent, and food prices advanced 1.2 percent. Excluding food and energy, the CPI-U increased 2.0 percent over the year."
The Midwest region is comprised of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.
South Region – September 2012
"Prices in the South up 0.5 percent over the month and 2.1 percent over the year"
"The Consumer Price Index for All Urban Consumers (CPI-U) for the South rose 0.5 percent in September, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Janet S. Rankin noted that energy prices increased 2.3 percent over the month. Food prices edged up 0.2 percent and the all items less food and energy index rose 0.3 percent. Within the all items less food and energy group, price increases were noted for a number of components including apparel, shelter, and education and communication."
"Over the last 12 months, the CPI-U advanced 2.1 percent. The index for all items less food and energy also rose 2.1 percent over the year.:
The South region is comprised of Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia.
West Region– September 2012
"Area prices were up 0.5 percent over the past month, up 2.2 percent from a year ago"
"Prices in the West Region, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), increased 0.5 percent in September, the U.S. Bureau of Labor Statistics reported today. (See table A.) Regional Commissioner Richard J. Holden noted that the September increase was influenced by higher prices for gasoline and apparel."
"Over the last 12 months, the CPI-U advanced 2.2 percent. (See chart 1.) Energy prices rose 3.1 percent, largely the result of an increase in the price of gasoline. The index for all items less food and energy rose 2.1 percent since September 2011."
The West Region covered in this release is comprised of the following thirteen states: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.
All regional data links: www.bls.gov/regions/consumerprices.htm
- West: [EEL-link id='2190' title='bls.gov/ro9/cpiwest.htm' ]
- South: [EEL-link id='3596' title='bls.gov/ro4/cpiso.htm' ]
- Midwest: [EEL-link id='2145' title='bls.gov/ro5/cpimid.htm' ]
- Northeast: [EEL-link id='2113' title='bls.gov/ro1/cpine.htm' ]
[Teacher Note: Assign groups of students to the four regions. They can examine their assigned region's data and summarize it for the whole class. They can speculate about the factors that have influenced prices in their assigned region.]
[The BLS also publishes data for major metropolitan areas. If your school is in one of the metropolitan areas, you can have students read their local data. www.bls.gov/bls/regnhome.htm .]
International Price Level Comparisons
The BLS also publishes comparisons of price level data for the major industrialized nations; the United States, Canada, Japan, France, Germany, Italy, Sweden, Switzerland, and the United Kingdom.
Heres a link for price level data: data.bls.gov/cgi-bin/surveymost?in
Take a look at the most recent data for these nine nations. Figure 4, below, shows the consumer price indexes in the nine countries, by percent change from same period of previous year, for the years 1995 through 2011.
What nations have experienced more or less inflation than the United States during this time period?
Take a look at Japan, where the price level fell (deflation) each year from 1999 to 2005, and again in 2009 and 2010. Many refer to the Japanese economy during the late 1990s and early 2000s as the "lost decade."
Note that the United Kingdom has experienced higher levels of annual price increases over the past several years than the other nations.
In a more detailed report, the BLS compares the consumer price indexes of 18 countries and areas. Go to this link: http://www.bls.gov/fls/intl_consumer_prices.pdf for the details.
Look at the graphs of the annual CPI changes for the nations. Do you see any patterns? Notice that all of the nations experienced a greater than normal increase in their CPIs in the year 2008.
[Teacher Note: The Federal Reserve Bank of Cleveland provides a tool to search for price level data for many nations. You can select countries and time periods. Students can use this online tool to learn about different countries or regions. Link: www.clevelandfed.org/research/data/world-inflation/index.cfm ]
Calculating the Price Index Changes
The BLS news release explains how the change in the price level index is calculated. “Movements of the indexes from one month to another are usually expressed as percent changes rather than changes in index points, because index point changes are affected by the level of the index in relation to its base period while percent changes are not. The example below illustrates the computation of index point and percent changes.”
“Percent changes for 3-month and 6-month periods are expressed as annual rates and are computed according to the standard formula for compound growth rates.” The data in Figure 5, below, indicates what the percent change would be if the current rate were maintained for a 12-month period. Note: This example uses seasonally adjusted CPI data.
[Teacher Note: given the levels of CPI data from one period to another, nationally, by region or local area, students should be able to use this formula to determine the rate of inflation.]
BONUS ACTIVITY: How much have consumer prices changed since you were born?
Use the BLS "Inflation Calculator" to determine how much the CPI has changed since the year you were born. LINK: data.bls.gov/cgi-bin/cpicalc.pl
First, take a guess. How much do you think consumer prices have changed in your lifetime? Put your year of birth into the calculator and hit "calculate" to find out the answer.
Finding Additional Data and Details in the BLS ReportTable 7. Chained Consumer Price Index for All Urban Consumers (C-CPI-U)
- Table 1. Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average, by expenditure category
- Table 2. Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average, by detailed expenditure category
- Table 3. Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average, special aggregate indexes
- Table 4. Consumer Price Index for All Urban Consumers (CPI-U): Selected areas, all items index
- Table 5. Chained Consumer Price Index for All Urban Consumers (C-CPI-U) and the Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, all items index
- Table 6. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by expenditure category, 1-month analysis table
- Table 7. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by expenditure category, 12-month analysis table
The CPI-U for the United States increased 0.6 percent in September, 2012, but most of that change was the rise in the price of gasoline. Other prices remained fairly stable. Inflation has not been a significant factor in most sectors, with the exception being the somewhat erratic fluctuations of energy and food prices. As the U.S. economy slowly recovers and unemployment remains stubbornly high, there are few pressures in consumer prices to rise.
Energy prices, especially gasoline and heating fuel, have jumped significantly in the past couple of months, as they have several times in recent years. Natural gas prices have remained low due, somewhat, to the mild winter weather across much of the nation. In the past, gasoline prices have gradually fallen back to near "normal" levels. Will they drop again?
When economic growth returns and jobs are created, consumer demand for goods and services may pressure the price level to rise. Some will see this as a good sign, as moderate inflation over time is a good sign for the economy.
Watch for possible Federal Reserve monetary policy actions to target some level of inflation.
- Make a list of the goods and services you purchase regularly (gasoline, food, clothes, entertainment, etc.) - Create 6-8 categories of goods and services.
- Pick one "unit" of a product from the various categories for your "market basket."
Identify the current price of that unit of the good or service.
Examples:CategoryUnitUnit PriceBasket PriceEnergy10 gal of regular gasoline$1.99$19.90Entertainment2 "first run" move ticket$7.50$15.00Food2 #3 "Extra Value" Meals$5.75$5.75Clothing1 pair of Levis 501 jeans$35.00$35.00
- Add the total cost of the items in your "market basket." (For example, your market basket may cost $125.00 for all of the items (total number of each unit times the price).
- Make the current price of the basket the "base" by designating it as 100.
- A month (or a year) from now, go back to the various stores and check the prices of the same items in the "market basket." Suppose the same items now cost $129.00. The price of the basket has increased by $4.00.
- Using this example, what has been your rate of inflation? A $4 increase from $125 to $129 is a 3.2% increase. (4/125 = .032) Your rate of inflation during that period was 3.2%.
- Determine the rate of inflation for your market basket. If you wait one month, you can multiply the monthly increase by 12 to determine an approximate annual increase (assuming that the prices rise at about the same rate each month).
This will give you an idea of how a "market basket" price index works. Of course, you would normally have to measure the changes in the prices of your index items for a longer period of time to see much inflation.
What do you think has happened to the prices of the items in your "market basket" in the past year?
What do you think will happen to those prices in the coming year?
- Does taking the food and energy items out of your basket make a difference?