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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported March 15, 2013, by the U.S. Bureau of Labor Statistics (BLS) for the month of February, 2013. 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 February 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 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 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 March 15, 2013, BLS press release of data on the consumer price index for the month of February, 2013.

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 second semester of this school year (January-May, 2013), 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.

  • December, 2012 (released January 16, 2013): CPI and inflation (deflation) basics: What is the CPI? What is inflation and deflation? How are they measured? What do they mean?
  • Janaury, 2013 (released February 21, 2013): Details and issues about the measurements and meaning of the measurements of the price level, adding additional concepts.
  • February, 2013 (released March 15, 2013): U.S. regional and global price level and inflation comparisons, with links to CPI data by region.  THIS LESSON
  • March, 2013 (released April 16, 2013): The relationships of CPI and inflation data to other economic data, such as GDP, employment. etc. and the business cycle.
  • April, 2013 (released May 16, 2013): End of year price level summary and potential issues.]

MATERIALS


Key Economic Indicators

as of March 15, 2013

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.7 percent in February after being unchanged in January. The index for all items less food and energy rose 0.2 percent in February after rising 0.3 percent in January.

Employment and Unemployment

Total nonfarm payroll employment increased by 236,000 in February, and the unemployment rate edged down to 7.7 percent. Employment increased in professional and business services, construction, and health care.

Real GDP

Real gross domestic product increased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 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, 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

In February, 2013, U.S consumer prices increased at the fastest monthly rate since July, 2008 - a monthly increase of 0.7%.   Over the past three years, the monthly increases in the CPI have ranged from -0.2 percent to 0.7 percent.  The pattern of month- to-month CPI changes has been, at best, erratic. 

Why?  For most of this period, the most important variable has been energy prices - especially gasoline.  The month-to-month changes of the "core" CPI over the past three years have ranged from -0.1 to 0.4 percent. The rise in the price of gasoline accounted for almost three-fourths of the overall CPI change in February.

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.  In February, the "core" CPI-U, less energy and food prices, rose only 0.2 percent, while the overall price level - the CPI-U - rose 0.7 percent.

[Teacher Note: Ask your students: Why do you think price volatility over a short period of time is a problem?  Or, it it? [Students may mention the changes in gasoline prices.  If prices are changing unpredictably, it makes decision-making difficult?   When do I fill my tank?  Will prices go up or down tomorrow?]

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, all quoted materials in ths leson are from the March 15, 2013, BLS announcement. www.bls.gov/news.release/archives/cpi_03152013.htm.

U.S. Bureau of Labor Statistics News Release
Consumer Price Index - February, 2013
Released March 15, 2013

"On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.7 percent in February after being unchanged in January. The index for all items less food and energy rose 0.2 percent in February after rising 0.3 percent in January."

The all-items CPI-U has increased at an annual rate of 2.0 percent over the past twelve months.  The "core" CPI also changed 2.0 percent over the past twelve months.  Figure 1, below, shows the monthly change in the CPI-U from 2002 to February, 2013.  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.

Figure 1

The BLS announcement continued with reference to energy and food prices. "The gasoline index rose 9.1 percent in February to account for almost three-fourths of the seasonally adjusted all items increase. The indexes for electricity, natural gas, and fuel oil also increased, leading to a 5.4 percent rise in the energy index. The food index increased slightly in February, rising 0.1 percent. A sharp increase in the fruits and vegetables index was the major cause of the 0.1 percent increase in the food at home index, with other major grocery store food group indexes mixed."  

Again, look at the history of gasoline prices to put this comment in perspective. 

Over the past year, the average price of gasoline (all types) went from a high of $392 in March, 2012, lower to $3.52 in July, up again to $391 in August, and back down to $3.41 in January.  In February, 2013, it popped back up to $3.75.   This volatility is why some look at the "core" index as a better measurement of the real inflationary trend over a longer time period.

Figure 2, below, shows the changes in price levels for the major CPI categories for the month of February, 2013, and for the twelve month period ending in February, 2013.  Notice again that the only major increases were in some energy prices, especially gasoline.

Figure 2

[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 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 March 15, 2013 BLS news release: www.bls.gov/news.release/archives/cpi_03152013.htm

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 Nominal Level of the CPI-U in February 2013

The nominal level of the CPI-U in February, 2013, was 232.166.  That is an increase of $1.89 from the January, 2013, 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.  That means the market basket of goods and services making up the CPI-U cost $100 in 1983-84.  That same market basket (after revisions for changes in consumer behaviors) cost $232.17 in February, 2013.  The price of the market basket increased $4.50 in one year - just slightly less that 20. percent.

[Teacher Note: Ask students if a $4.50 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 $4.50 buy?]

How much inflation have we experienced since 1982-84?  The CPI-U index has increased by 132.166 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 February, 2013, see Table 1 of the BLS news release.  Consumer Price Index - February 2013, www.bls.gov/news.release/archives/cpi_03152013.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 adjusted level is re[ported as the month-to-month change and the annual level is the reported as the index number for the year.

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 2.0 percent over the last 12 months to an index level of 232.166 (1982-84=100). For the month, the index increased 0.8 percent prior to seasonal adjustment."

"The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.9 percent over the last 12 months to an index level of 228.677 (1982-84=100). For the month, the index increased 1.0 percent prior to seasonal adjustment."

The market basket that cost $100 (CPI-U) in 1982-84 now costs about $228.68.

[Teacher Note: Ask your students: Does a 129% increases in prices over 30 years seem like a lot? (Opinions will vary.  This is a good time to examine how lifestyles have changed over 30 years.)]

"The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 1.8 percent over the last 12 months. For the month, the index increased 0.7 percent on a not seasonally adjusted basis. Please note that the indexes for the post-2011 period are subject to revision."

The price level for “urban wage earners and clerical workers” (CPI-W) increased slightly less than the CPI-U in February. The “chained” index increased slightly less than the CPI-U and CPI-W.  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 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., but in February, 2013, Midwest prices rose more than the 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 February, 2013, in the Northeast, Midwest, West and South regions.

Consumer Price Index, Northeast Region – February 2013

“Regional prices up 0.6 percent over the month and 2.0 percent over the year”

"The Consumer Price Index for All Urban Consumers (CPI-U) in the Northeast region rose 0.6 percent in February—the largest one-month increase since March 2011, the U.S. Bureau of Labor Statistics reported today. Martin Kohli, the Bureau’s chief regional economist, noted that the recent rise reflected one-month increases in the indexes for all items less food and energy (0.4 percent) and energy (3.0 percent), while the food index edged down 0.2 percent. (Data in this report are not seasonally adjusted. Accordingly, month-to-month changes may reflect the impact of seasonal influences.)

The CPI-U and its largest component, all items less food and energy, each posted over-the-year price advances of 2.0 percent. The indexes for energy and food also rose since February 2012, up 2.8 and 1.6 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 – February 2013

“Prices in the Midwest up 1.1 percent in February and 2.2 percent higher over the year”

"The Consumer Price Index for All Urban Consumers (CPI-U) in the Midwest advanced 1.1 percent in February – the largest increase since June 2009, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Charlene Peiffer noted that motor fuel prices, up 13.7 percent, also registered their largest gain since June 2009. Overall, energy costs rose 8.0 percent in February. Food prices were unchanged and the index for all items less food and energy increased 0.4 percent."

"The CPI-U for the Midwest rose 2.2 percent from February 2012 to February 2013. The energy index, which includes motor fuel and household fuels, advanced 4.4 percent and the index for food was up 1.7 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 – February 2013

“Prices in the South up 0.9 percent over the month and 1.8 percent over the year”

"The Consumer Price Index for All Urban Consumers (CPI-U) for the South rose 0.9 percent in February, the U.S. Bureau of Labor Statistics reported today. Sheila Watkins, the Bureau’s regional commissioner, noted that energy prices advanced 5.2 percent over the month and prices for food edged up 0.2 percent. The index for all items less food and energy rose 0.4 percent. Within the all items less food and energy group, price increases were noted for a number of components including shelter and apparel. (Data in this report are not seasonally adjusted. Accordingly, month-to-month changes may reflect the impact of seasonal influences.)"

"Over the last 12 months, the CPI-U advanced 1.8 percent. The index for all items less food and energy increased 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.

Consumer Price Index, West Region — February 2013

“Area prices were up 0.8 percent over the past month, up 2.0 percent from a year ago”

"Prices in the West Region, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), increased 0.8 percent in February, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Richard J. Holden noted that the February increase was influenced by higher prices for gasoline. (Data in this report are not seasonally adjusted. Accordingly, month-to-month changes may reflect seasonal influences.)"

"Over the last 12 months, the CPI-U increased 2.0 percent, largely due to increased shelter prices. Energy prices rose 3.1 percent reflecting higher gasoline and electricity costs. The index for all items less food and energy advanced 2.0 percent since February 2012."

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.

[Teacher Note: Tell your students to 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/bls/regnhome.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  states and major metropolitan areas.  If your school is in one of the metropolitan areas, you can have students read their local data.  Select your state and then your metropolitan area. www.bls.gov/regions/cpi.asp

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. 

BLS International Comparisons Link: www.bls.gov/fls/

Take a look at the most recent data for the nine industrialized 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 2012.

Figure 4

Which 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 annual report, the BLS compares the consumer price indexes of 16 regions, the "International Indexes of Consumer Prices."  Go to this link: www.bls.gov/ilc/intl_consumer_prices.htm#chart03 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 ]

[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 5

[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 Report

CONCLUSION

February, 2013, was a perfect example of how one data point - the price of gasoline, in this case - can impact the overall level of prices.  Here, again, is what the BLS reported on March 15, 2013.

"On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers increased 0.7 percent in February after being unchanged in January. The index for all items less food and energy rose 0.2 percent in February after rising 0.3 percent in January."

So, if you do not drive a car, were you unaffected by inflation in February?  Think about all of the ways a change in gasoline prices can impact other prices - transporting goods, production that uses a large amount of energy, air fares, etc.

If energy prices continue to increase, what will result?   Keep an eye on gasoline and other energy prices this spring.

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
    $3.49
    $34.90
    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?

EDUCATOR REVIEWS