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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 February 21, 2013, BLS press release of data on the consumer price index and rate of inflation for the month of January, 2013.

TASK

  • Identify the current rate 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.

PROCESS

According to the web site InflationData.com, the U.S. economy has experienced an average annual rate of inflation of 3.23 percent since 1913, as measured by the consumer price index. That means, on average, a good or service that cost $1 in 1913 cost about $23 at the end of 2012 – a compound inflation of 2300 percent over 100 years.

[Source:inflationdata.com/Inflation/Inflation/DecadeInflation.asp. InflationData.com uses BLS CPI-U data.]

To illustrate a "trend line" hold a strait edge across the graph (Figure 1) so that it generally follows the averages over time.  In this case, the trend line will not be at approximately 3.23, because the time period is a shorter period than the 1913-2012 average.

"On February  21, 2013, the BLS announced: "The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in January on a seasonally adjusted basis... Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment."

U.S. inflation during the past year has been lower than the annual average for the past 100 years, at 1.6 percent (January 2012 to January 2013.)  This happened after an extended economic slowdown following the most severe recession since the Great Depression of the 1930s and recent period of renewed economic growth  Is a little inflation a sign of recovery?

Students: Does an inflation rate of 1.6 percent over a year seem bad or good?  Have you noticed price increases in the past year? It might be interesting to guess which product prices have increased and which have decreased in the past year.  See the CPI data by product: www.bls.gov/cpi/cpid1109.pdf ]

Figure 1, below, shows the monthly rates of change in the CPI-U since 2002.  Note the periodic ups and downs, and a trend line over time of just over 3 percent.

Figure 1

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

Figure 2

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

U.S. Bureau of Labor Statistics: Consumer Price Index - January 2013

Released February 21, 2013

"The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in January on a seasonally adjusted basis... Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment."

Note: Unless otherwise cited, quoted materials in this lesson are from the Bureau of Labor Statistics, February 21, 2012, "Consumer Price Index - January 2013" announcement.

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

The Impact of Food and Energy Prices

"The index for all items less food and energy increased 0.3 percent in January. This increase offset another decline in the gasoline index and resulted in the seasonally adjusted all items index being unchanged, as it was last month."

"The energy index fell 1.7 percent in January. Along with the gasoline index, the natural gas and fuel oil indexes also declined, while the electricity index increased. The index for food was unchanged in January after increasing in each of the previous ten months. The food at home index was unchanged with major grocery store food group indexes mixed."

The "Core" CPI-U in January 2013

"Increases in the indexes for shelter and apparel accounted for much of the increase in the index for all items less food and energy, with advances in the indexes for recreation, medical care, and airline fares also contributing."

Changes in the CPI - January 2012 to January 2013

"The all items index increased 1.6 percent over the last 12 months; the 12-month change has been slowing since its recent peak of 2.2 percent in October. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as the last two months. The food index has risen 1.6 percent over the last 12 months while the energy index has declined 1.0 percent."

For the details of the January 2013 CPI-U data, including comments on the effect of energy and food prices, see the BLS announcement, Economic News Release

Students: What are the pros and cons of the reported CPI-U and the "core" rate as reliable measures of inflation?

Students Have you noticed changes in food prices - either in grocery stores or restaurants?  It may be interesting to look at the history of prices in this category.  See Table 2 .]

Take a look at the prices level changes in January 2013 for the major spending categories.  Figure 3, below, shows the "Percent Change in the CPI, All Urban Consumers, U.S. City Average, January 2013."  Note the spending categories that increased and decreased in January.

Figure 3

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

The all urban consumer group represents about 87 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. The CPI for All Urban Consumers (CPI-U) is the index most often reported by the national media.

The Level of the CPI-U

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.6 percent over the last 12 months to an index level of 230.280 (1982-84=100). For the month, the index increased 0.3 percent prior to seasonal adjustment."

The market basket of goods and services that cost an urban consumer $230.28 in January, 2012, cost $226.67 in January 2012.  Remember, this CPI-U data is based on a base period of 1982-84.  That same market basket cost just $100 in 1982-84.  Take a look at the history of the level of the CPI-U at this BLS webpage: data.bls.gov/cgi-bin/surveymost

Students: Is a price increase of $3.61 in a year very significant?

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

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is based on the expenditures of households included in the CPI-U definition that also meet two requirements: more than one-half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. The CPI-W population represents about 32 percent of the total U.S. population and is a subset, or part, of the CPI-U population. The CPI for Urban Wage Earners and Clerical Workers (CPI-W) is the index most often used for wage escalation agreements.

The BLS reported the CPI-W for January as: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.5 percent over the last 12 months to an index level of 226.520 (1982-84=100). For the month, the index increased 0.3 percent prior to seasonal adjustment."

Prices for "wage earners and clerical workers" rose slightly less (0.1 percent) last year than prices for all urban consumers.  In the last month the prices for urban workers rose slightly more.

Consumer price indexes often are used to escalate or adjust payments for rents, wages, alimony, child support and other obligations that may be affected by changes in the cost of living. The BLS has published a fact sheet explaining how to use the CPI for escalating (negotiating) employment contracts.

The CPI may not be an appropriate measure of inflation for all population groups. For example, the CPI-U is designed to measure inflation for the U.S. urban population and thus may not accurately reflect the experience of people living in rural areas. Also, the CPI does not produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly or the poor.

The CPI, Inflation and the Cost of Living

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

"The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies."

"The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, and not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living."

"Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework."

Extra attention is given by forecasters to the core index as it tends to show more lasting trends in prices. The rates of change in the core index were higher in the early part of the year and that did cause concern about the trend in inflation. The concern was that the increase in energy prices over the last several years may have started to influence rates of increases in all other prices. While that concern still exists, core prices are increasing at relatively slower rates.

The "headline" rate - the rate most often reported in the media includes energy and food. Adding the more volatile energy and food prices often shows greater rates of change. In some cases, a drop in energy prices added to inflation in other categories will end up showing a net "no change."

Students: Which of the two measurements of price changes, the headline rate or the core rate, is the more meaningful measure of inflation?

Calculating the Rate of Inflation Over a Period of Time

The CPI Inflation Calculator allows customers to calculate the value of current dollars in an earlier period, or to calculate the current value of dollar amounts from years ago. The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households. This index value has been calculated every year since 1913. For the current year, the latest monthly index value is used.

Students: Select a time period and determine the rate of inflation over that period.  You can also research to find events or forces that impacted the price level during that period.

The BLS has published an online reading, "The Consumer Price Index —Why the Published Averages Don't Always Match An Individual's Inflation Experience ." This may answer some of your questions about your experiences with price level changes.

Looking Back in CPI History

win picture

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

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

The October 21, 2011, a New York Times article reported that McDonalds has raised its hamburger prices twice over the past year (1 percent in March and another 1.4 percent in May) and may raise prices again to offset high beef prices.

Students: Have you noticed any price changes for the good and services you buy?

CONCLUSION

Over the past year, the U.S. economy has experienced an annual rate of inflation of 1.6 percent.  That is about half of the average annual rate of 3.23 percent since 1913.  A good or service that cost $1 in 1913 cost about $23 in January, 2013. 

Though the annual average inflation is 3.23 percent, the inflation rate has ranged from a high inflation rate of 20.0 percent in 1918 to a low rate of -10.8 percent (deflation) in 1921.  Over the past 20 years, the high has been an increase of 4.2 percent in 1991 and a low rate of minus 0.4 percent (deflation) in 2009.

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

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

Students: What do you think is going to happen to consumer prices in the next year? 

What will be the signs of  future inflation?

Note:  In mid-February, U.S. gasoline prices rose significantly.  This price rise will not be included in the consumer price index until the BLS announcement for February, scheduled for March 15, 2013, unless, of course, gas prices fall later in the month. 

ASSESSMENT ACTIVITY

EXTENSION ACTIVITY

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

One resource that may be of interest to students is the BLS online publication, "How BLS Measures Price Change for College Tuition and Fees in the Consumer Price Index."

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

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