This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported November 19, 2008, by the U.S. Bureau of Labor Statistics for the month of October, 2008. Students 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 consumers and the economy.


Business, Business Cycles, Causes of Inflation, Deflation, Economic Security, Inflation, Macroeconomic Indicators, Price, Price Stability, Trade-offs among Goals


  • Identify the current rate and recent changes in the consumer price index.
  • Identify factors that have influenced recent changes in the inflation rate.
  • Identify the potential policy implications for 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 November 30, -0001


Each month, the U.S. Bureau of Labor Statistics (BLS) releases an estimate of the rate of inflation in the United States for the previous month. This lesson focuses on the BLS report of the Consumer Price Index (CPI) in October, 2008.

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.

BLS announcement, November 19, 2008: Consumer Price Index: October 2008

"The Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.0 percent in October, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The October level of 216.573 (1982-84=100) was 3.7 percent higher than in October 2007.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) decreased 1.3 percent in October, prior to seasonal adjustment. The October level of 212.182 (1982-84=100) was 3.8 percent higher than in October 2007.

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) decreased 0.8 percent in October on a not seasonally adjusted basis. The October level of 124.784 (December 1999=100) was 3.3 percent higher than in October 2007. Please note that the indexes for the post-2006 period are subject to revision.”


Key Economic Indicators

as of November 19, 2008


The Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.0 percent in October, before seasonal adjustment. The October level of 216.573 was 3.7 percent higher than in October 2007.

Employment and Unemployment

The unemployment rate rose by 0.4 percentage point to 6.5 percent in October, and the number of unemployed persons increased by 603,000 to 10.1 million.

Real GDP

U.S. real gross domestic product decreased at an annual rate of 0.3 percent in the third quarter of 2008,(advance estimate). In the second quarter, real GDP increased 2.8 percent.

Federal Reserve

At its October 29 meeting, the Federal Open Market Committee decided to reduce the target for the federal funds rate by 1/2 percent (50 basis points) to 1.0 percent.


The BLS announcement tells us that consumer prices in the United States have decreased and, if the trend continues, will result in the phenomenon called “deflation.” It seems to confirm a change in the direction of prices that was first hinted in the report for the month of September.

The announcement added that the October decrease was “the largest one month decrease since publication of seasonally adjusted changes began in February 1947." Compared to a year ago, the October index was up 3.7 percent (annual rate). Just two months ago, the reported annual rate of CPI change was over one percent higher.

Components of the October 2008 CPI:

[Note to teachers: The student version of this focus on economic data does not include the details about each index category as follows in the teacher version.]

  • Energy: The energy index fell 8.6 percent in October following declines of 1.9 percent in September and 3.1 percent in August. Motor fuel prices continued to decline in October, with the gasoline index falling 14.2 percent. Despite the decline, gasoline prices remain 12.0 percent above their October 2007 level. The index for household energy items declined 0.9 percent following a 3.4 percent decrease in September. Petroleum based household fuel prices continued to decline, but the October decreases were moderated by an increase in the electricity index.
  • Food: The food index increased 0.3 percent in October, a smaller advance than the average monthly increase of 0.7 percent during the June through September period. Compared with a year earlier, the food index was up 6.3 percent. The index for all items less food and energy turned down in October, declining 0.1 percent to a level 2.2 percent above October 2007.  Contributing to the decrease in October were declines of 1.0 percent in the apparel index, 4.8 percent in the airline fare index, 1.6 percent in the index for lodging away from home, and 0.7 percent in the index for new and used motor vehicles.  The food and beverages index rose 0.3 percent in October after a 0.6 percent increase in September. The index for food at home increased 0.1 percent in October after increasing at least 0.6 percent in each of the preceding four months. Five of the six grocery store food groups decelerated in October. The fruits and vegetables index declined 2.2 percent in October after a 0.5 percent decrease in September. The index for dairy and related products also registered a larger decline, falling 1.0 percent in October after a 0.6 percent decline in September. The indexes for cereals and bakery products, for meats, poultry, fish and eggs, and for other food at home all rose more slowly in October than September. All three indexes rose 0.6 percent in October after increases in September of 1.1, 1.0, and 1.1 percent, respectively. Nonalcoholic beverages and beverage materials was the only major grocery store food group to increase more rapidly in October, increasing 1.2 percent after a 0.7 percent increase in September. The other indexes in the food and beverages group, food away from home and alcoholic beverages, rose 0.5 percent and 0.4 percent in October, respectively.
  • Housing: The housing index was virtually unchanged in October after declining 0.1 percent in September. The shelter index, which rose 0.3 percent in September, was virtually unchanged in October. Within shelter, the index for rent of primary residence rose 0.4 percent in October after a 0.3 percent increase in September. The index for owners’ equivalent rent, which increased 0.2 percent in September, rose 0.1 percent in October. The lodging away from home index turned down sharply in October, falling 1.6 percent after a 0.9 percent increase in September. (On a not seasonally adjusted basis, the index for lodging away from home fell 1.7 percent in October and was 1.4 percent below its October 2007 level). The household energy index declined 0.9 percent in October as declines in the fuel oil and natural gas indexes more than offset an increase in the electricity index. The index for household furnishings and operation was virtually unchanged in October after rising 0.5 percent in September.
  • Transportation: The transportation index declined sharply in October, falling 5.4 percent as several major components of the index declined significantly. The motor fuels index fell 13.9 percent in October after declining 0.8 percent in September. (Prior to seasonal adjustment, motor fuel prices fell 14.8 percent in October but were 12.3 percent higher than in October 2007). The index for new and used motor vehicles declined for the third straight month, falling 0.7 percent in October. The new vehicles index declined 0.5 percent in October. (Prior to seasonal adjustment, new vehicle prices fell 0.1 percent and have declined 2.3 percent since October 2007.) The index for used cars and trucks declined 2.4 percent in October after a 1.8 percent decrease in September. The index for public transportation declined 3.3 percent in October as the airline fare index fell 4.8 percent. (Prior to seasonal adjustment, airline fares fell 4.4 percent but are 10.4 percent higher than in October 2007.)
  • Apparel: The index for apparel fell 1.0 percent in October following a 0.1 percent decline in September. (Prior to seasonal adjustment, apparel prices rose 0.9 percent in October and were 0.3 percent higher than in October 2007.)
  • Medical Care: The medical care index rose 0.2 percent in October after rising 0.3 percent in September, and was 2.8 percent higher than a year ago. The index for medical care commodities--prescription drugs, nonprescription drugs, and medical supplies—and the index for medical care services each increased 0.2 percent in October. Within the latter group, the index for physicians’ services rose 0.1 percent and the index for hospital and related services increased 0.4 percent.
  • Recreation: The index for recreation advanced 0.1 percent in October, following a 0.2 percent increase in September. The index for video and audio declined 0.6 percent in October, while the index for photography declined 0.8 percent and the index for toys fell 0.5 percent. The indexes for pets and pet products and services and for sporting goods increased substantially in October, rising 0.9 percent and 1.5 percent, respectively.
  • Education and Communication: The index for education and communication rose 0.2 percent in October after a 0.1 percent increase in September. The index for education rose 0.4 percent in October, the same increase as in September. The index for communication was virtually unchanged in October after declining 0.2 percent in September. Within communication, the index for telephone services rose 0.1 percent while the index for information technology, hardware and services declined 0.3 percent.
  • Other: The index for other goods and services rose 0.3 percent in October following a 0.2 percent increase in September. The index for tobacco and smoking products rose 0.4 percent in October after being virtually unchanged in September, while the index for personal care, which rose 0.3 percent in September, advanced 0.2 percent in October.

 Figure 1 shows a breakdown of the CPI changes by major expenditure category for the last three months, August through October, 2008



Table 1. Percent changes in CPI All Urban Consumers (seasonally adjusted)


Changes from proceeding month

Compound Annual Rate for 3 mos. Ended

Unadjusted for 12 mos. Ended


Aug. 2008

Sept. 2008

Oct. 2008

Oct. 2008

Oct. 2008

All items






Food & Beverages
























Medical Care


















Other goods and services






Special indexes:


















   All items less food

   and energy






What is the Consumer Price Index?

The Consumer Price Indexes (CPI) is a monthly measurement of changes in the prices paid by urban consumers for a representative 'market basket' of goods and services. An increase in the CPI from one month to another may be evidence of 'inflation' in the price level or a reduction in purchasing power.

For details about the make-up of the CPI “market basket,” see the BLS online publication “Consumer Price Index Frequently Asked Questions ” and choose question six.

To read more about how the BLS measures price changes, see the BLS online publication “How BLS Measures Changes in Consumer Prices .”

The Basics - What is Inflation?

Inflation is generally defined by the BLS as "a process of continuously rising prices, or equivalently, of a continuously falling value of money." The CPI compares the prices of a set of goods and services relative to the prices of those same goods and services in a previous month or year. Changes in the prices of those goods and services approximate changes in the overall level of prices paid by consumers.

If the prices of goods and services increase, the purchasing power of a dollar of income decreases. If prices increase by 5 percent, and your income remains the same, you can't purchase as many goods and services with your income. If your income increases by 5 percent and prices increase by 5 percent, the inflation negates your increase in income. Your 'real' income does not increase.

When prices decrease and income remains constant, real income increases. If your nominal income increases by 5 percent and the price level decreases by 1 percent, your real purchasing power increases by 6 percent.

[Note to teacher: There are several other measurements of “inflation.”]

The Consumer Price Index for All Urban Consumers (CPI-U) measures the price of a “basket” of goods and services in urban areas. This is the most commonly used measurement of changes in the price level.

The Producer Price Index (PPI) measures the average change in wholesale prices – the prices paid by producers for inputs.

Core inflation is the CPI, excluding food and energy prices, which are historically more volatile.

The Personal Consumption Expenditures (PCE) deflator measures the total cost of expenditures. Example: The total cost of pharmaceutical drugs is counted in the PCE index, while only the consumer's insurance co-pay is counted in the CPI.

The GDP deflator (implicit price deflator for GDP) is a measure of the change in prices of all new, domestically produced, final goods and services in an economy.

The Employment Cost Index (ECI) measures changes in the costs of labor for businesses in the United States.

Recent U.S. Inflation Trends

Figure 2 shows recent inflation data reported for each month. It is obvious that the monthly inflation figures change a great deal from one month to the next. Look at how the monthly increases have been higher over the most of the last two and a half years and have reversed dramatically in recent months.


Inflation Figure 2


Figure 2 shows the changes in the core index compared to the changes in the overall CPI. Obviously the changes in prices other than energy and food have been significantly smaller than the changes in the overall index. That is due to the much greater volatility in energy and food prices.


Inflation Figure 3


Core Inflation

The media often mentions the “core rate” of inflation and the “headline rate.” What’s the difference?

Typically, changes in the CPI or inflation are reported in the media in two ways, 1) The CPI (all sectors) and 2) the 'core' rate of inflation that excludes food and energy prices. The overall CPI data is often referred to as the 'headline number' because that number is reported in the news.

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 is 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. Recent decreases in energy prices have somewhat reduced the difference between the reported rate and the core rate.

Energy and food prices have historically fluctuated more than other (core) prices. October is a good example. According to the BLS, the energy price index fell 8.6 percent in October following declines of 1.9 percent in September and 3.1 percent in August. Motor fuel prices fell 14.2 percent in October. Gasoline prices reached over $4.00 a gallon just a couple of months ago and now have dropped to around $2.00. Planners and business owners have a difficult time factoring in prices that change so rapidly.

The media will now commonly report that the annual rate of (headline) inflation is now just 3.7 percent, down from the 4.9 percent annual rate increase reported in September. Core inflation reported at an annual rate is now just 2.2 percent.

Wait a Minute! Aren’t Lower Prices Good News?

Consumers may read the news about lower prices and feel better, given all of the recent bad economic news. Their incomes can now purchase just a little bit more. Whether or not this is good news, depends on whether the consumers are purchasing the goods and services that have decreased in price. In October, some prices increased and others did not. If the "general price level" decreases over a period of time, "deflation" results.

A November 20, "New York Times" article by Vikas Bajaj addressed the potential for and the impact of deflation.

"The Labor Department reported that prices of consumer goods and services fell by a record amount in October, while another report showed that a measure of home building fell for the fourth straight month, to its lowest level in the 49 years that the government has kept that data.

While most consumers might welcome the idea that things are getting cheaper, deflation is an economists’ nightmare. It was a hallmark of the Depression and Japan’s so-called lost decade in the 1990s. A big worry is that deflation would blunt the impact of interest rate cuts by the Federal Reserve, forcing policy makers to use other tools to try to revive the economy."

"The vice chairman of the Fed, Donald L. Kohn, said that the risk of deflation, defined as a “general decline in prices,” remained slight but had increased. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said in response to a question after a speech. The Fed, he added, would be aggressive, if necessary, to prevent a broad drop in prices.

"Analysts say a sustained decline in consumer prices would be terrible for the economy. Businesses that cut prices to attract buyers are likely to have to lay off workers as well. They may also have little left over to pay lenders or shareholders.

Prices are falling outside the United States too. Consumer prices declined in Britain, France, Germany and elsewhere in Europe in October, and prices were flat in September in Japan, which has fought deflation on and off for nearly two decades.

The decline in consumer prices is all the more remarkable because this summer many economists were concerned about inflation and the prospect for stagflation, in which inflation and unemployment rise simultaneously, contrary to their usual relationship. “It’s funny that just a few months ago everyone was wringing their hands over inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s gone. It’s over.”

"It would take significant and persistent contraction in the economy to push core inflation into negative territory,” said Dean Maki, an economist at Barclays Capital in New York. “We do not think that is likely, especially given the aggressive policy response on the part of the Fed and Treasury.”"

Student Directions: Read the above exerpts from Vikas Bajaj's New York Times article. Are we headed for "defation"? What wil have to ahpen i n the economy for "deflation" to result?


 Discussion Questions


  1. Which measurement, the CPI-U or the core rate, is the most meaningful? [Answers will vary. Those concerned with the prices they currently pay for all goods and services, including energy and food, may see the CPI-U as more important. These prices are what they actually pay from one time to another. Consumers will typically base their spending plans on prices they currently pay or expect to pay. Inflation created uncertainty about future purchasing power. Policy planners may look more at the core rate because energy and food prices have tended to go up and down over time, even if the longer term trend is upward. Planners must, necessarily, look at longer trend periods.]
  2. Why would someone say that borrowers benefit from unanticipated inflation? [If a borrower receives a loan at say, 10 percent interest, and repays it over time, the borrower will repay the loan with income that is inflated (assuming that the borrower's income has kept pace with inflation). Normally, the lender will include anticipated inflation into the interest rate charged. If inflation during the life of the loan is greater than the anticipated rate, the borrower will benefit.]


The general price level in the United States, as measured by the Consumer Price Index decreased by 1.0 percent in October 2008. The price decrease seems to be a predictable result of the overall decline in U.S. economic activity. The demand for many productive resources has decreased and unemployment has increased. Excluding energy and food, the price level was essentially unchanged. The October decrease was met with speculation about the possibility of "deflation" and further deteriorating economic conditions.

These lessons over the past few years have often raised questions about the impact of inflation and its impact on consumers, investors, producers and government planners.

  • How will consumers respond if their purchasing power diminishes.
  • How will investors react when the real returns of their investments decrease?
  • Will producers cut back when input costs increase?
  • How do planners manage budgets when faced with rising prices?

For now, these questions may be just the opposites. What is the impact of lower prices on their behaviors?


How Much Do You Weigh in the CPI?

The BLS announcement mentions, “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.” This recognizes that people do not have the same spending patterns. This also means that price level changes for various goods and services affect people differently.

A high school student who spends a large portion of his or her income on transportation, clothing and entertainment is more greatly affected if those prices change. If you do not pay rent, housing prices are not a very important part of your cost of living. When the price of gasoline falls, the student who spends much of his or her income on gasoline will gain purchasing power.

When housing costs (rents or rental equivalents) increase, the family that spends a large portion of their income on rent may lose purchasing power, even if other prices do not increase as much. Someone who lives in a large city and does not drive may not be affected very much by changes in gasoline prices.

Go to: “The Consumer Price Index--Why the Published Averages Don't Always Match An Individual's Inflation Experience ” 

Determine your own 'Personal Price Index,' by determining the percentage of your spending in each category. This will give you your own 'weights' for each spending category. See the 'hypothetical individual' example in the reading.

How are you affected by inflation compared to the average urban consumer and each other? Do you spend a larger percentage of your income on automobiles, gasoline or entertainment?

How does inflation impact you, your family and other demographic groups?

Presidential Advisor Role-play

Have students role-play different groups.

  • Average consumers
  • Producers/business owners
  • Retired or unemployed people
  • Government planners
  • People who owe money
  • Bankers with outstanding loans
  • Assign students to one of the groups.

Tell the students:

You have been invited to make a two minute presentation to President-elect Barack Obanma about how you are impacted by inflation or deflation. How much priority do you think the President should give to the prospects for deflation in his new policies? 

[Note to teacher: Students should know generally how inflation and deflation can affect each group and how their view compares to the other groups. There is no precise answer as to which group is affected the most negatively or how the new president may respond.]

See the article, "The Impact of Inflation, Federal Reserve Bank of Boston ", Winter 1997, by Rebecca Hellerstein.