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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation for the month of October, 2012, reported the U.S. Bureau of Labor Statistics (BLS) on November 15, 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.

KEY CONCEPTS

Consumer Price Index (CPI), Deflation, Inflation, Inflation Risk, Macroeconomic Indicators, Price Level, Price Stability, Real vs. Nominal

STUDENTS WILL

  • Identify the rate and change in the consumer price index and rate of inflation in the United States in October, 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 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

Near the middle of 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 November 15, 2012, BLS press release of data on the consumer price index for the month of October, 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. www.bls.gov/bls/list.htm   ]

[Note on the CPI and Inflation "Focus on Economic Data" LessonsDuring the first semester of this school year (September-December, 2012), EconEdLink will publish four lessons on "Consumer Price Index and Inflation." During this time period, the Focus on Economic Data will begin with the "basics" in September and progressively focus on more complex data, issues, and comparisons. All monthly lessons will include the current data and significant recent changes.

  • August 2012: CPI and inflation (deflation) basics: What is the CPI? What is inflation and deflation? How are they measured? What do they mean? Released September 14, 2012.
  • September 2012: Details and issues about the measurements and meaning of the measurements of the price level, adding additional concepts. Released October 16, 2012.
  • October 2012: U.S. regional and global price level and inflation comparisons, with links to CPI data by region.  THIS LESSON, Released November 15, 2012.
  • November 2012: The relationships of CPI and inflation data to other economic data, such as GDP, employment. etc. and the business cycle. Released December 14, 2012.

RESOURCES


Key Economic Indicators

as of November 15, 2012

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.2 percent before seasonal adjustment.

Employment and Unemployment

Total nonfarm payroll employment increased by 171,000 in October, and the unemployment rate was essentially unchanged at 7.9 percent. Employment rose in professional and business services, health care, and retail trade.

Real GDP

Real gross domestic product increased at an annual rate of 2.0 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 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

Between September and October, 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 again were the biggest influence on the overall price level change, but an increase in housing prices influenced some upward change.

While the overall change in the consumer price index for all urban consumers (CPI-U) was just 0.1 percent, gasoline fell 0.6 percent after increases of 9 and 7 percent in August and September.  The rise in the price of gasoline had accounted for about 80 percent of the total increase in the CPI-U in August and September.

Housing prices became a factors, as, "The shelter index increased 0.3 percent, its largest increase since March 2008, and accounted for over half of the seasonally adjusted all items increase."

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 sections in this lesson are from the November 15, 2012, Bureau of Labor Statistics "Consumer Price Index Summary" press release. URL:
www.bls.gov/news.release/archives/cpi_11152012.htm

[Teacher Note:  To introduce the basic concept of inflation, use the Council for Economic Education's Virtual Economics video program, "Inflation." URL: www.econedlink.org/interactives/index.php?iid=205

Or, use the Kahn Academy video, "Introduction to Inflation."  URL: www.khanacademy.org/finance-economics/macroeconomics/v/introduction-to-inflation

For an introduction to the basic concepts of markets and prices, use the video program, "Markets and Prices." URL:  www.econedlink.org/interactives/index.php?iid=216]

A Note from the BLS about the Impact of Hurricane Sandy

The BLS commented that, "Hurricane Sandy had virtually no impact on data collection efforts or survey response rates for October."  Such a disaster my have an impact on prices since the hurricane, either nationally or just in the directly impacted Northeast region. Keep an eye out for the BLS news release on consumer prices for November.

[Teacher Note:  Ask your students how they think the hurricane might affect prices.  The demand for building materials and home furnishings will increase.  Goods and services produced in the affected area may be in short supply.  Overall demand in areas where many homes were destroyed may decrease as people find other housing. Consumers may delay some large item purchases.]

U.S. Bureau of Labor Statistics News Release
Consumer Price Index Summary - October, 2012
Released November 15, 2012

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in October on a seasonally adjusted basis, the U.S.Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.2 percent before seasonal adjustment."

Link to the full November 15, 2012 news release: www.bls.gov/news.release/archives/cpi_11152012.htm

Remember, the "all items" index includes all spending catagories and the "core" index excludes the generally more volatile energy and food prices.

The all-items CPI-U has increased at an annual rate of 2.2 percent over the past twelve months.  After slightly greater increases in the overall price level in August and September, 2012, primarily driven by energy prices, the annualized rate of increased remained slow by historical standards and within the Federal Reserve System's "unofficial" target of 2 percent inflation.

Figure 1, below, shows the monthly change in the CPI-U from 2002 through October, 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.  In 2012, there was a slight decrease in May, no increase in June and July, jumps to 0.6 percent in August and September, and back to just 0.1 percent in October.  The primary reason for this month-to-month volatility?  Gasoline price changes.

figure 1

The BLS announcement continued with reference to those categories that significantly changed in October.  "The shelter index increased 0.3 percent, its largest increase since March 2008, and accounted for over half of the seasonally adjusted all items increase. The index for all items less food and energy rose 0.2 percent, as the rise in the shelter index and increases in the indexes for apparel and airline fare more than offset declines in the indexes for used cars and trucks, new vehicles, and recreation."

Again, look at the history of gasoline prices to put this comment in perspective. "The energy index, which had risen sharply in August and September, declined slightly in October. Major energy component indexes were mixed, with declines in the indexes for gasoline and natural gas more than offsetting increases in the indexes for electricity and fuel oil."

The month-to-month volatility of energy prices is why some look at the "core" index as a better measurement of the real inflationary trend over a longer time period.  The BLS commented, "The 12-month change in the index for all items was 2.2 percent in  October, an increase from the September figure of 2.0 percent. The 12-month change in the index for all items less food and energy remained  at 2.0 percent. The food index rose 1.7 percent over the last 12 months, and the energy index increased 4.0 percent."

[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.]

Figure 2, below, shows the changes in price levels for the major CPI categories for the month of October, 2012, and for the twelve month period ending in October.  Notice again that the only major increases were in some energy prices, especially gasoline.

[Teacher Note:  Tell students to take a good look 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 November 15, 2012 BLS news release: www.bls.gov/news.release/archives/cpi_11152012.htm   Ask: 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 October 2012

The nominal level of the CPI-U in October, 2012, was 231.317.  That is an increase of 4.896  from the October, 2011, level.   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.  The BLS announcement refers to it as "an index level of 231.317 (1982- 84=100)."  This means the market basket of goods and services cost $100 in 1983-84.  That same market basket (after revisions for changes in consumer behaviors) cost $231.32 in October 2012.  The price of the basket increased $4.90 in the last year - 2.2 percent.

[Teacher Note: Ask students if a $4.90 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 $4.90 buy?]

How much inflation have we experienced since 1982-84?  The CPI-U index has increased by 132.317 points, so the price level has slightly more than doubled in that period of time, a 132% increase in about 28 years.  Simply put, it has increased by an average of about 3-4 percent per year.

[Teacher Note: Again, for more detailed price index data for October, 2012, see Table 1 of the BLS news release.  Consumer Price Index Summary - October 2012, www.bls.gov/news.release/archives/cpi_11152012.htm

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 2.2 percent over the last 12 months to an index level of 231.317 (1982- 84=100). For the month, the index was unchanged prior to seasonal adjustment."

"The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.2 percent over the last 12 months to an index level of 227.974 (1982-84=100). For the month, the index decreased 0.1 percent prior to seasonal adjustment."

"The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 1.9 percent over the last 12 months. For the month, the index was unchanged 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 at the same rate as the CPI-U in February. The “chained” index increased slightly less than the CPI-U.  Revisit the definitions of these CPI measurements for a review of the differences.  BLS FAQs www.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 big 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 level changes in four large regions of the United States, the states, and major metropolitan areas through its regional offices.  Price levels will vary from region to region for a variety of reasons.  

Figure 3, below, show some of the key regional price level data.  Note some regional differences.  The general price level is much higher in the Northeast than in other regions.  Prices are generally lower in the Midwest, relative to the 1982-1984 base year.  Energy prices increased much more in the past year in the West than in other regions.

figure 3

The BLS reports CPI data monthly for the four U.S. regions.  The following are the most recent BLS press releases on the regional consumer price indexes for October, 2012, in each region.

Consumer Price Index, Northeast Region – October 2012

"Regional Prices Up 0.1 Percent Over the Month and 1.9 Percent Over the Year"

"The Consumer Price Index for All Urban Consumers (CPI-U) in the Northeast region inched up 0.1 percent in October, the U.S. Bureau of Labor Statistics reported today. Deborah A. Brown, the Bureau’s regional commissioner, noted that one-month increases in the all items less food and energy index and the food index (0.2 percent each) were nearly offset by a decrease in the energy index (-0.9 percent)."

"Over the last 12 months, the CPI-U increased 1.9 percent, due mostly to an advance in the all items less food and energy index, up 1.7 percent.  The energy and food indexes also rose since October 2011, up 3.5 and 1.5 percent, respectively."

The Northeast region is comprised of Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont.

Midwest Region Consumer Price Index – October 2012

"Prices in the Midwest down 0.3 percent in October, but 2.2 percent higher over the year"

"The Consumer Price Index for All Urban Consumers (CPI-U) in the Midwest was down 0.3 percent in October, the largest monthly decline in a year, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Charlene Peiffer noted that most of the decline was attributable to a 5.3-percent decrease in the energy index. Partially offsetting the lower energy costs, food prices rose 0.4 percent and the index for all items less food and energy was 0.3 percent higher in October."

"The CPI-U for the Midwest rose 2.2 percent from October 2011 to October 2012. The energy index, which includes motor fuel and household fuels, advanced 4.1 percent and food prices were up 1.6 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.

Consumer Price Index, South Region – October, 2012

"Prices in the South down 0.2 percent over the month; up 2.1 percent over the year"

"The Consumer Price Index for All Urban Consumers (CPI-U) for the South edged down 0.2 percent in October, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Janet S. Rankin noted that energy prices decreased 4.1 percent over the month, while the indexes for all items less food and energy and for food each edged up 0.3 percent. Within the all items less food and energy group, apparel and shelter were among the indexes that recorded increases."

"Over the last 12 months, the CPI-U advanced 2.1 percent. The index for all items less food and energy increased 2.0 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.

Consumer Price Index, West Region– October 2012

"Area prices were up 0.4 percent over the past month, up 2.5 percent from a year ago"

"Prices in the West Region, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), increased 0.4 percent in October, the U.S. Bureau of Labor Statistics reported today. (See table A.) Regional Commissioner Richard J. Holden noted that the October increase was influenced by higher prices for gasoline and apparel."

"Over the last 12 months, the CPI-U advanced 2.5 percent. Energy prices increased 7.0 percent, largely the result of an increase in the price of gasoline. The index for all items less food and energy advanced 2.2 percent since October 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.

Take a look at the price level and inflation data for your region and/or your closest large metropolitan area.  Go to the link to your region. You may also be able to find your state data.

All regional data links: www.bls.gov/regions/consumerprices.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 tracks price level data for 18 industrialized nation and reports complete consumer price data for 16 nations. BLS Link: www.bls.gov/ilc/intl_consumer_prices.htm#table01

Take a look at the most recent data for the 16 nations reported.  Do you see any patterns of similarities or differences between the 18 nations and the United States, or among the world regions?

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.

[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: http://www.clevelandfed.org/research/data/world-inflation/index.cfm ]

[Teacher note: For more details about the CPI, go to the BLS web page, ' ]

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.

figure 4

[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 October 2012 News Release

ASSESSMENT ACTIVITY

CONCLUSION

Again, between September and October, 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 again were the biggest influence on the overall price level change, but an increase in housing prices influenced some upward change.

While the overall change in the consumer price index for all urban consumers (CPI-U) was just 0.1 percent, gasoline fell 0.6 percent after increases of 9 and 7 percent in August and September.  The rise in the price of gasoline had accounted for about 80 percent of the total increase in the CPI-U in August and September.

Housing prices became a factors, as, "The shelter index increased 0.3 percent, its largest increase since March 2008, and accounted for over half of the seasonally adjusted all items increase."

Inflation is apparently not a serious threat in the near-term.  A major shock to energy prices can change that, but other factors are very positive.  U.S. economic growth is moderate, not putting much pressure on prices to rise.  More growth may bring more upward price pressure.  If that happens, watch for possible Federal Reserve monetary policy actions to target inflation.

Note: Watch for the BLS announcement for November, 2012, for information about the possible impact of Hurricane Sandy.

EXTENSION ACTIVITY

You Can Design Your Own Personal CPI
 
  1.  Make a list of the goods and services you purchase regularly (gasoline, food, clothes, entertainment, etc.) - Create 6-8 categories of goods and services.
  2. Pick one "unit" of a product from the various categories for your "market basket."
  3. Identify the current price of that unit of the good or service.
    Examples:
    Category
    Unit
    Unit Price
    Basket Price
    Energy
    10 gal of regular gasoline
    $3.29
    $32.90
    Entertainment
    2 "first run" move ticket
    $7.50
    $15.00
    Food
    2 #3 "Extra Value" Meals
    $5.75
    $5.75
    Clothing
    1 pair of Levis 501 jeans
    $35.00
    $35.00

     
  4.  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).
  5. Make the current price of the basket the "base" by designating it as 100.
  6. 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.
  7. 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%.
  8. 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).
  9. 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?