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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 November 15, 2012, BLS press release of data on the consumer price index for the month of October, 2012.  This lesson adds  information about U.S. regional and international price levels.

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

TASK

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

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

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.

Students: How do you think the hurricane might affect prices? 

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 categories 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."

Students: Make sure you understand 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? 

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.

figure 2

Students: Can you identify your personal consumer behaviors and wants that influence how you are affected by inflation?  What happened to the prices of the goods and services you purchase most often?

Students: Who do you think was affected the most by inflation in October? 

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.

Students:  Does a $4.90 increase in the price level in one year seem like a lot?  Assuming someone's 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.

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.”

Students have you noticed any prices that change with the seasons or relative to big events or other factors.  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

Students: Pick one of  the four regions.  Examine the region's data and summarize it for the whole class.  Speculate about the factors that have influenced prices in the region.

The BLS also publishes data for major metropolitan areas.  If your school is in one of the metropolitan areas, you can read your 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.

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.  You 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.

figure 4

Students:  Given the levels of CPI data from one period to another, nationally, by region or local area, you 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

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.

ASSESSMENT ACTIVITY

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?