Governments and other financial organizations are constantly measuring trends in the economy to try to predict what will happen next. The ability to successfully economic trends has a profound effect on whether or not a business will make a profit or lose money. The economy also affects people's personal lives by helping them make good decisions: Is this a good time to buy a car? Refinance your home? Take a new job? One of the measurements used to evaluate and predict the economy is the CPI, or Consumer Price Index.
- Define CPI (Consumer Price Index) and describe how it measures inflation.
- Describe the effect of inflation on the economy.
- Describe and compare how the U.S. Government and the Federal Reserve Board use economic indicators such as the Consumer Price Index to predict developments in the economy and to make decisions.
Governments and financial organizations are constantly measuring trends in the economy to try to predict what will happen next. Predicting economic trends successfully can have a profound effect on whether or not a business will make a profit or lose money. People also depend upon predictions about the economy as they make decisions in their personal lives: Is this a good time to buy a car? Refinance your home? Take a new job? The answer may depend upon a prediction about interest rates or developments in the labor market. What information might people turn to for help in making such predictions? One source of information used to evaluate and predict the economy is the CPI, or Consumer Price Index.
Consumer Price Index: Frequently Asked Questions
7-Eleven: Students can estimate the cost of a Big Gulp
MarketPlace.org: Audio transcript of news broadcast of December 14, 2001. Begins shortly above the Rundown.
CPI Calculator: Online Consumer Price Index Calculator
Time-Warp: Students can explore the technology innovations that were created during any decade they choose.
Testimony of Katharine G. Abraham: Commissioner Of Labor Statistics Before The Senate Finance Committee February 11, 1997
Students will read and analyze the information on a web site to answer a series of discussion questions.
Have the students access the CPI Calculator web site:
Have the students estimate the current cost of a "Big Gulp" using the description found on the 7-Eleven web site (an extra-large 32 ounce fountain soda: see and search under their products and services to find the "Big Gulp") and then use the CPI calculator to compare the cost of a Big Gulp now and in the year they were born.
Ask the students if the prices have increased or decreased since the year they were born. Then ask them why the prices might have changed since they were born. To find out, have the students access the Consumer Price Index Frequently Asked Questions page, located on the Bureau of Labor Statistics web site.
The following questions will help to guide the students' online learning experience; teachers could use the questions to structure, a class discussion or a writing assignment. Students can work individually or in small groups to find the answers and then share them with the rest of the class.
What is the CPI? What does the CPI measure?[The CPI (Consumer Price Index) is a measure of the change over time in the prices paid by urban consumers for a market basket of goods and services.]
Why is it important to measure the economy? List at least three ways in which the CPI might affect your life. [The CPI helps measure the purchasing power of the consumer's dollar; it is used to adjust consumers' income payments, such as Social Security; it affects eligibility levels and cost-of-living wage adjustments to Social Security beneficiaries, food stamp recipients, and military and Federal Civil Service retirees and survivors; it affects wage increases set by many collective bargaining agreements; and it adjusts the Federal income tax structure.]
What is the relationship between the CPI and inflation? [The CPI measures inflation (a sustained rise in prices in an economy) as experienced by consumers in their day-to-day living expenses.]
What is the difference between the CPI-U and the CPI-W? [CPI-U represents all "urban workers", including professional, self-employed, retired, and unemployed workers, while CPI-W additionally includes workers where more than half of the household income comes from clerical or wage occupations and at least one of the household's earners must have been employed at least 37 weeks in the previous 12 months.]
Why do you think there are different indexes for the CPI-U and the CPI-W? [CPI-U represents varied people, including professional workers with high salaries, retired people on fixed incomes, self-employed people with variable incomes, and the unemployed, while CPI-W represents only wage earners.]
Give at least three reasons why the reported CPI might be different from your personal experience with prices. [The CPI is based on the experience of the "relevant average household." Differences noted by individuals may reflect factors associated with specific cities or regions, personal choices, and the fact that the CPI represents only the 87 percent of the population that lives in urban areas-- not those living in rural or farm areas, or those serving in the armed forces.]
List at least three limitations of the CPI. [The CPI measures prices paid by urban, not rural workers. The CPI measures time-to-time changes in one place, not region-to-region. Also, there may be logistical lags (time for completion) in conducting surveys.]
Students may also want to explore the following web sites for help in answering Question 8:
Students will need to select and go to a decade by scrolling the time bar. Then they can explore the technology innovation that were created during that decade.
- List three factors that might cause the CPI to change: [Three factors that might cause the CPI to change are: consumer buying habits, shifts in population distribution or demographics, drugs become generic (and therefore less expensive) after losing patent protection.]
Read the audio transcript of the MarketPlace.org news broadcast of December 14, 2001 for help in answering Question 9.
- What is the significance of the change in the core CPI rate? [In 2001, the Federal Reserve lowered interest rates 11 times in an attempt to boost the economy. The November 2001 CPI rate may be showing some sign of inflation, which would have a profound effect on whether or not the Federal Reserve continues to lower interest rates.]
By completing this lesson, students will learn how the CPI is used to measure inflation and economic trends, and how these affect the decision-making process for government, businesses, and individuals.
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