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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation for the month of November, 2012, reported on December 14, 2012, by the U.S. Bureau of Labor Statistics (BLS). Students read data from the BLS report, analyze the meaning of the CPI data, determine the change in consumer prices, and explore the impact of the change in the price level on themselves, their families, consumers, and producers.

KEY CONCEPTS

Inflation, Macroeconomic Indicators, Price Stability, Real vs. Nominal

STUDENTS WILL

  • Identify the current level and recent changes in the consumer price index.
  • Identify the factors that have influenced recent changes in the rate of inflation.
  • Identify the potential policy implications of the current economic conditions, including deflation.
  • Describe how inflation and deflation impact individuals, families, and different groups in the economy.

Current Key Economic Indicators

as of 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 wage 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 December 14, 2012, BLS press release of data on the consumer price index for the month of November, 2012.

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


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

Note on the CPI and Inflation "Focus on Economic Data" Lessons:

During the 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 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 (reported 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 (reported September 14, 212)  Details and issues about the measurements and meaning of the measurements of the price level, adding additional concepts.
  • September 2012  (reported October 16, 2012)  Data by U.S. regions and other criteria
  • October 2012  (reported November 15, 2012)  Data by U.S. region and international  (trends, identifying trends and comparisons of regions and demographic groups).
  • November 2012  (reported December 14, 0212) End of year price level summary and possible connections to other macroeconomic data. THIS LESSON]

MATERIALS


Key Economic Indicators

as of December 14, 2012

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.3 percent in November after rising 0.1 percent in October. The index for all items less food and energy rose 0.1 percent in November after increasing 0.2 percent in October

Employment and Unemployment

Total nonfarm payroll employment rose by 146,000 in November, and the unemployment rate edged down to 7.7 percent. Employment increased in retail trade, professional and business services, and health care.

Real GDP

Real gross domestic product increased at an annual rate of 2.7 percent in the third quarter of 2012 (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.

Federal Reserve

The Federal Open Market 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, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

PROCESS

Economic News Release: Consumer Price Index - November 2012
U.S. Bureau of Labor Statistics
Released: December 14, 2012

"On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers decreased 0.3 percent in November after rising 0.1 percent in October. The index for all items less food and energy rose 0.1 percent in November after increasing 0.2 percent in October."

Prices dropped significantly in November, primarily due to the decrease in energy prices - specifically gasoline.  Without the energy and food components, commonly called the "core" index, the price level increased by jut 0.1 percent in November.

The Federal reserve and government seems to be achieving one of the nation's primary macroeconomic goals - price stability - without any big new policy actions.  Unfortunately, those macroeconomic policies are also unable to end the persistently high unemployment rate and slower-than-wanted real GDP growth rate.

What About Energy and Food Prices?

"The gasoline index fell 7.4 percent in November; this decrease more than offset increases in other indexes, resulting in the decline in the seasonally adjusted all items index. The energy index fell 4.1 percent in November despite increases in the indexes for natural gas and electricity."

"The food index rose 0.2 percent with the food at home index increasing 0.3 percent, the same increases as in October. The index for all items less food and energy increased 0.1 percent in November after a 0.2 percent increase in October."

The CPI-U and the "Core" CPI

"The all items index (CPI-U) increased 1.8 percent over the last 12 months, a decline from the 2.2 percent figure in October. The index for all items less food and energy (core index) rose 1.9 percent over the last 12 months, slightly lower than the October figure of 2.0 percent. The food index has risen 1.8 percent over the last 12 months, and the energy index has risen 0.3 percent.

Reminder: The CPI-U, reported by the BLS, includes all categories of consumer prices and the “core” index is all price categories, excluding food and energy. According to the BLS, this measurement of price level change "is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks that cannot be damped through monetary policy. However, all consumer goods and services, including food and energy, are represented in the headline CPI (included food and energy)."

[Teacher Note:  Ask your students if they think the "headline" CPI (including energy and food) or the "core" rate (excluding energy and food) is the best measurement of inflation or the price level as it is meaningful to consumers?]

Figure 1, below, shows the monthly changes in the CPI-U from 2000 to the present.  Note the occasional sharp change, up and down, in some periods time.  Most of these have been due to energy price changes.

Figure 1

For a breakdown of the CPI-U data by major expenditure group, go to the December 14, 2013, BLS announcement, Table A.  What categories increased or decreased in November?  URL: www.bls.gov/news.release/archives/cpi_12142012.htm


[Teacher Note: Ask your students if they have notice any recent signs of rising prices or falling prices - other than gasoline prices.  This is a good time to explain that, according to the online BLS Glossary, inflation is "a process of continuously rising prices, or equivalently, of a continuously falling value of money."  The change in some prices in one or two months may not be considered "inflation." ]

The BLS measurement of the CPI-U includes all urban consumers, representing about 87 percent of the total U.S. population. "It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural non-metropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals." Source: Whose Buying Habits Does the CPI Reflect?

[Teacher Note: Students can discuss which prices they have noticed increasing or decreasing in the past year or month. Their experiences will depend on their buying habits. They may not notice furniture prices, but they will notice gasoline prices.]

With a few exceptions, these price indexes are seasonally adjusted. According to the BLS, "many economic series, including the CPI, are adjusted to remove the effect of seasonal influences-those which occur at the same time and in about the same magnitude every year. Among these influences are price movements resulting from changing weather conditions, production cycles, changeovers of models, and holidays."

Calculating the CPI-U

The BLS explains how the CPI-U is calculated:

"The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 25,000 retail establishments-department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments. All taxes directly associated with the purchase and use of items are included in the index."

"Prices of fuels and a few other items are obtained every month in all 87 locations. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other areas. Prices of most goods and services are obtained by personal visits or telephone calls of the Bureau's trained representatives."

"In calculating the index, price changes for the various items in each location are averaged together with weights, which represent their importance in the spending of the appropriate population group. Local data are then combined to obtain a U.S. city average."

"For the CPI-U and CPI-W separate indexes are also published by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for 27 local areas. Area indexes do not measure differences in the level of prices among cities; they only measure the average change in prices for each area since the base period. For the C-CPI-U data are issued only at the national level. It is important to note that the CPI-U and CPI-W are considered final when released, but the C-CPI-U is issued in preliminary form and subject to two annual revisions."

"The index measures price change from a designed reference date. For the CPI-U and the CPI-W the reference base is 1982-84 equals 100.0. The reference base for the C-CPI-U is December 1999 equals 100. An increase of 16.5 percent from the reference base, for example, is shown as 116.5. This change can also be expressed in dollars as follows: the price of a base period market basket of goods and services in the CPI has risen from $10 in 1982-84 to $11.65." 

What is the Current Level of the CPI-U?

The CPI is an index, measuring the price level change from a base period. The current base period of the CPI-U when the price of the "market basket" of goods and services was $100, is the 1982-84 period (averaged).

From the BLS announcement, "The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.8 percent over the last 12 months to an index level of 230.221 (1982-84=100)"

The current consumer price index number is 230.221. That means that the market basket of goods and services that cost $100 in 1982-84 now costs slightly over $230. The basket cost $231.317 in October, 2012 and decreased by about $1 in the last month. The cost of the market basket increased about $4.00 between November, 2011, and November, 2012. 

Though the 12-month trend is for the price level to increase, the CPI defied the trend in November.  Although you can say that there was some "inflation" in the past year, there was no "inflation" in November.

The CPI-U is a Weighted Index

"The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. 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. Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals"  www.bls.gov/cpi/cpifaq.htm#Question_3

Each category of spending is assigned a weight, based on the approximate percentage of the household's total spending.  Housing is, by far, the largest expenditure component - weighted almost 42 percent of the total basket value. Source: Consumer Price Index for all Urban Consumers: U.S. City Average, by Expenditure Category and Commodity and Service Group

[Teacher Note: Students may be interested in determining their own "weighted index." What percent of their monthly expenses go to different spending categories? Are their "weights" similar to the BLS CPI-U market basket weights?]

Inflation Calculator

You can use the BLS "Inflation Calculator" to determine price level change over any period of time (beginning in 1913) or to determine the buying power of the dollar at any given time compared to another. For instance, $100 in 1913 had the same relative “buying power” as $2,262 in November, 2011. A good that cost $100 in 1913 (all other things being equal) would cost $2,262 today. If electronics prices had been consistent with the CPI-U over time an I-Pod that cost $200 today would have cost just $115.55 in 1990 (if you could have bought an I-Pod in 1990).

Try the CPI Inflation Calculator to determine the historical price of something you might buy today.  Remember, prices of all expenditure categories have not changed at the same rate. Any calculation you make with the calculator is based on the changes in the "CPI-U for all Items."

[Teacher Note: Students should be able to calculate the CPI for the year they were born.]

Anticipating Inflation

When the rate of inflation can be predicted or is consistent over time, planners can better predict future prices and make more informed investments. Higher (or lower) costs can be factored into investment and consumption decisions.

What results when prices unexpectedly change? Uncertainty results. Planners, businesses and others agree to contracts and investments based on expected returns - including some premium for anticipated inflation. Unanticipated inflation hurts lenders and helps borrowers. When borrowers or lenders are uncertain, they may choose not to act - not to invest - not to borrow.

In August to December, 2008, there were some fears of long-term deflation - a falling price level. Falling prices can have a similar deterring effect on business investors. Some feared a downward price spiral. When producers anticipate falling product prices, they are normally less willing to supply or invest in future output. This idles some of the nation's productive capacity. As investment also falls, it leads to further decrease in aggregate demand. The spiral continues.

It looks like the economy is finally turning around. Real GDP is growing.  With little threat of inflation, planning is easier and private investments can be made with a little more certainty.  Again, high energy and food prices can derail the recovery.

Is the Price Level Related to Other Economic Data?

Historically, there have been apparent correlations between changes in the price level - inflation - and economic growth and employment.  Take a look at the trends of the CPI-U, real GDP growth and unemployment rates over the past several years.  Do you see any common trends?

First, look at the model of the business cycle - the continuous ups and downs of the economy.  This model represents the changes in growth and employment over a "cycle."  The NBER's Business Cycle Dating Committee looks at the data to determine whether or not the economy is an a period of growth or decline - possible a recession.

"The NBER's Business Cycle Dating Committee maintains a chronology of the U.S. business cycle. The chronology comprises alternating dates of peaks and troughs in economic activity. A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years."  Link: www.dev.nber.org/cycles/recessions.html

Figure 2

Compare the business cycle (Figure 2, above) to the quarterly changes in the CPI-U (Figure 3, below).  Do you see any relationship?

Figure 3

Compare the business cycle (Figure 2, above) and history of the CPI-U (Figure 3, above) to the recent history of U.S. real GDP growth (Figure 4, below).  Do you see any common trends?

Figure 4

Compare the business cycle (Figure 2, above) with the recent history of the unemployment rate.  Do you see any common trends?  Now look at the unemployment rate (Figure 5, below) compared to real GDP growth (Figure 4, above).  Any common trends?

Figure 5

The Federal Reserve System's monetary policies are aimed at maintaining economic growth, full employment and a stable price level.  Figure 6, below, shows the target range for the federal funds rate for the last decade.   The extremely low federal funds rate has been maintained since 2008 to encourage growth and employment coming out of the 2008-2009 recession.  Look closely at the changes in the federal funds rate (Figure 6) and the changes in the CPI-U (representing inflation) over time.  Do you see any connections?

Figure 6

[Teacher Note:  Students should be able to draw conclusions about the relatioanships of the macroeconomic data points over time.  Do they move together in some logical pattern?]

ASSESSMENT ACTIVITY

CONCLUSION

Gasoline Prices in 2012

There was not really significant change in the general price level (CPI-U) over the past year. Energy, especially gasoline, prices did shift up and down much more than the average prices.

November was a good example of how the greater volatility of energy prices can impact the overall (all items) CPI measurement.  Energy prices increased in earlier months of 2012,  fell in the mid-year, increased again in the fall, and have decreased in the last two months. 

Take a look at the average gasoline prices in the first eleven months of 2012.  

Gasoline Price Index
Average Price
All Types, U.S. City Average 2012
(Average price per gallon)
 January  $3.947
 February  $3.622
 March  $3.918
 April  $3.976
 May  $3.839
 June  $3.602
 July  $3.502
 August  $3.759
 September  $3.908
 October  $3.839
 November  $3.542


Take another look at the price level changes by spending category to see which goods and services followed the trend - steady prices - and those that increased or decreased more than the average. www.bls.gov/news.release/cpi.t01.htm

A Note About the Chained CPI

As of the time of the writing of this lesson, economists, politicians, and interest groups are debating a proposal to change the measurement of inflation used to adjust payments such as Social Security.  The proposed alternative to the CPI-U is the "Chained CPI."

The Consumer Price Index (CPI-U) follows the price of a market basket of goods and services commonly purchased by household. The market basket is fixed, with some changes over time.

A chained index adjusts its make-up with consumers’ tendency to substitute one product for another in response to a change in price. If the price of one good changes, consumers seek another good as a substitute.  When consumers seek and purchase substitutes, their total expenditures may be less.

Keep and eye out for this debate.  Which a better measure of real inflation?

EXTENSION ACTIVITY

Producer Price Index

The BLS also tracks and reports on producer prices, reported as the Producer Price Index (PPI). According to the BLS, "The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services. "

The PPI includes measurements of "crude" goods and "intermediate" goods. The PPI for Finished Goods tracks the average change in prices over time of domestically produced and consumed commodities. The index is comprised of prices for both consumer goods and capital equipment, but excludes the prices of services.

The December 13, 2012, BLS announcement of the PPI for the month of November 2012 reported, "The Producer Price Index for finished goods fell 0.8 percent in November. Prices for finished goods decreased 0.2 percent in October and rose 1.1 percent in September. The index for finished goods less foods and energy advanced 0.1 percent in November."

Go to the BLS Producer Price Index Web page.

Which measurement , CPI or PPI, do you think give us more meaningful information about price stability in the economy?

College and Work Opportunities for High School Graduates

On April 19, 2012, the BLS released a report on "College Enrollment and Work Activity of 2011 High School Graduates " Take a look at this interesting data. Remember, those who graduated in 2011 left school during the economic recovery, but while the unemployment rate was still high.  Will future graduates have more opportunities than in past years?

"In October 2011, 68.3 percent of 2011 high school graduates were enrolled in colleges or universities, the U.S. Bureau of Labor Statistics reported today. Recent high school graduates not enrolled in college in October 2011 were more likely than enrolled graduates to be working or looking for work (68.7 percent compared with 38.8 percent)"

Link:  www.bls.gov/news.release/hsgec.nr0.htm