This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported April 15, 2009, by the U.S. Bureau of Labor Statistics (BLS) for the month of March, 2009. 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 themselves, their families, consumers, and producers.
- 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.
Current Key Economic Indicatorsas of November 10, 2014
The Consumer Price Index for All Urban Consumers increased 0.1 percent in October on a seasonally adjusted basis. The core inflation rate increased the same amount. For the previous 12 months, the index increased 1.7%, the same rate as reported in the September report.
According to the October report of the Bureau of Labor Statistics, the unemployment rate fell from 5.9% to 5.8%, and the number of individuals unemployed also decreased. Total nonfarm employment rose by 214,000 in October. Employment gains were concentrated in retail trade, food services and health care.
The advance estimate for real GDP growth in the third quarter of 2014 was 3.5%, a decrease from the revised second quarter growth of 4.6%. Inventory investment reduced third quarter growth, while it added to second quarter growth. In addition, consumer spending increased at a lower rate in the third quarter, compared to the second. Finally, business investment increased in the third quarter, but at a lower rate than in the second quarter.
The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.
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. 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 April 15, 2009, BLS press release of data on the consumer price index.
[Note to teachers: You can subscribe to receive monthly BLS email news releases. To subscribe, go to the BLS News Service Subscription Page .]
[Note to teachers: For the latest updates on U.S. economic indicators, go to:
[Note on the CPI and Inflation "Focus on Economic Data" Lessons:
During the second half of this school year (January-May), 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.
- January: CPI and inflation (deflation) basics: What is the CPI? What is inflation and deflation? How are they measured? What do they mean?
- February: Details and issues about the measurements and meaning of the measurements of the price level, adding additional concepts.
- March: Detailed breakdown of the data by region and other criteria (trends, identifying trends and comparisons of regions and demographic groups).
- April: The relationships of CPI and inflation data to other economic data, such as GDP, employment. etc. and the business cycle. THIS LESSON.
- May: School year-end review and analysis.]
BLS April 15, 2009 CPI Release: This release provides Consumer Price Index Information for March 2009.
How the Government Measures Unemployment: This BLS publication discusses the process used to measure U.S. unemployment.
Frequently Asked Questions About the CPI: This site answers FAQ's for those trying to read CPI releases.
Inflation Calculator: This calculator allows users to compare price changes over time due to inflation.
The Economy at a Glance: This BLS page provides current U.S. Economic Indicators.
BLS News Service Subscription Page: The reader can subscribe to receive monthly BLS email news releases.
EconomicIndicators.gov: This site provides the latest updates on U.S. economic indicators.
BLS Economic Indicators: This site provides the latest updates on U.S. economic indicators.
BEA Economic Indicators: This site provides the latest updates on U.S. economic indicators.
Fact Sheet on Seasonal Adjustment in the CPI: This page explains the CPI adjustment Process.
Assessment Activity: This interactive quiz tests students' understanding of the CPI lesson.
Consumer Price Indexes in Nine Countries, Percent Change From Same Period of Previous Year, 1995-2009: This table provides data from nine industrialized nations.
U.S. Import and Export Price Indexes, March 2009: This page discusses price changes for U.S. imports and exports.
Key Economic Indicatorsas of April 15, 2009
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in March. The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955.
In March, the number of unemployed persons in the U.S. increased by 694,000 to 13.2 million, and the unemployment rate rose to 8.5 percent.
U.S. real gross domestic product decreased at an annual rate of 6.3 percent in the fourth quarter of 2008,
At its March 18 meeting, the FOMC kept its target for the federal funds rate at 0 - 1/4 percent and suggested that the rate will be kept low in the near future.
The U.S. Bureau of Labor Statistics announcement: Consumer Price Index: March, 2009
Released April 15, 2009
CPI for All Urban Consumers (CPI-U)
"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955."
The annual decrease since March 0f 2008 and the more recent very small increases in the CPI indicate that inflation is not currently a threat in our economy. The current issue may be either future inflation fueled by growth or deflation that may result from a continued downturn. The big problem may be the uncertainty that faces planners, policymakers and consumers. A continuing variable is energy prices that tend to fluctuate more than other prices. Recent history has showed us that energy prices can escalate and/or decline at relatively rapid rates in both growing and declining world economies.
Figure 1 shows the monthly changes in the CPI-U from 2002 through March 2009. You will notice the erratic pattern of changes in the past couple of years, from periods of increase to periodic declines in the price level. The significant declines in late 2008 brought fears of "deflation," but the trend changed in early 2009 to very moderate inflation. The annual decline in the CPI-U from March 2008 to March 2009 was the first annual price level decline in over fifty years.
Seasonally Adjusted CPI-U
"On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in March after rising 0.4 percent in February. The decrease was due to a downturn in the energy index, which declined 3.0 percent in March after rising 3.3 percent the previous month. All the energy indexes decreased, particularly the indexes for fuel oil, natural gas, and motor fuel. The food index declined 0.1 percent for the second straight month to virtually the same level as October 2008. The food at home index declined 0.4 percent, the second straight such decrease, as the index for dairy and related products continued to decline."
Figure 2 compares the monthly changes in the non-seasonally adjusted and the seasonally adjusted CPI-U data from January 2008 through March 2009. Notice that the adjustment vary greatly over the time period. Some adjustments are similar each year due to climate or predictable changes in economic activity. Other adjustments may result from autonomous events, such as Hurricane Katrina or the September 11, 2001 attacks. These kinds of events produce dramatic, normally sort-term, price fluctuations outside the normal anticipated range.
|Figure 2: Changes in the CPI-U 2008-2009
Seasonally Adjusted and Not Adjusted
Non-Seasonally Adjusted vs. Seasonally Adjusted CPI Data: What's the Difference?
According to the April 15 BLS report, seasonally adjusted data is also reported because "price data are used for different purposes by different groups...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."
Who uses the unadjusted data? The BLS says, "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."
"Each year, the last 5 years of seasonally adjusted data are subject to revision based on more accurate long-term data. Some data from January 2004 through December 2008 was revised in January 2009. The BLS revised the data in January 2009 based on twenty-nine seasonal factors, including selected food and beverage items, motor fuels, electricity and vehicles. A t times, seasonal adjustments are made to account for unusual or one-time factors. For example, adjustments were made for motor fuels to offset the effects of events such as damage to oil refineries from Hurricane Katrina in August of 2005."
"Seasonal adjustment removes the effects of recurring seasonal influences from many economic series, including consumer prices. The adjustment process quantifies seasonal patterns and then factors them out of the series to permit analysis of non-seasonal price movements. Changing climactic conditions, production cycles, model changeovers, holidays, and sales can cause seasonal variation in prices. For example, oranges can be purchased year-round, but prices are significantly higher in the summer months when the major sources of supply are between harvests."
The BLS publication, "Fact Sheet on Seasonal Adjustment in the CPI," further explains the adjustment process. "Seasonal adjustment removes the effects of recurring seasonal influences from many economic series, including consumer prices. The adjustment process quantifies seasonal patterns and then factors them out of the series to permit analysis of non-seasonal price movements. Changing climactic conditions, production cycles, model changeovers, holidays, and sales can cause seasonal variation in prices. For example, oranges can be purchased year-round, but prices are significantly higher in the summer months when the major sources of supply are between harvests."
[Teacher Note: Link to the BLS publication, "Fact Sheet on Seasonal Adjustment in the CPI ."]
The "Core Index" Less Food and Energy Prices
The BLS report further refines the price level data as it reports the "core" CPI index. "The index for all items less food and energy increased 0.2 percent for the third month in a row. An 11.0 percent increase in the index for tobacco and smoking products accounted for over sixty percent of the March rise, with a 0.6 percent increase in the new vehicles index also contributing. In contrast, the indexes for lodging away from home, used cars and trucks, and airline fares continued to decline. The index for all items less food and energy has risen 1.8 percent over the past year."
The BLS publishes both the "headline" CPI "All Items CPI for All Urban Consumers (CPI-U)" and the "core" CPI-U for "All Items Less Food and Energy." The "core" CPI, is preferred by many economic analysts and policymakers under the assumption that food and energy prices are volatile and are subject to price shocks that cannot be controlled by monetary policy. All consumer goods and services, including food and energy, are represented in the headline CPI. Although the core is less volatile, all prominent legislation uses the CPI includes food and energy. Social security and federal retirement benefits are updated each year for inflation by the All Items CPI for Urban Wage Earners and Clerical Workers (CPI-W). Personal income tax regulations and Treasury Inflation-Protected Securities (TIPS) returns are based on the "headline" CPI-U.
April 5, 2009, BLS Comments on Specific Spending Category Prices
"The food and beverages index declined 0.1 percent in March, the same decrease as in February. A 0.4 percent decrease in the food at home index more than offset 0.1 percent increases in the indexes for food away from home and for alcoholic beverages. Within food at home, the indexes for three of the six major grocery store food groups declined. The largest decline was in the dairy and related products in Price Index, which fell 2.4 percent in March, the same decrease as in February, as the milk index declined 4.4 percent. The index for meats, poultry, fish and eggs decreased 0.9 percent, the fifth straight monthly decline, as the index for eggs fell 4.6 percent and the beef index declined 1.4 percent. The index for cereals and bakery products also declined in March, while the other food at home index was virtually unchanged. Registering increases in March were the indexes for fruits and vegetables and for on alcoholic beverages. The food index has increased 4.4 percent over the past year, with the food at home index up 4.3 percent."
"After being virtually unchanged in February, the housing index declined 0.1 percent in March. The shelter index was virtually unchanged in March. The indexes for rent and owners’ equivalent rent both rose 0.2 percent, but these increases were offset by a 2.4 percent decrease in the index for lodging away from home. This was the sixth straight monthly decline in that index, which has fallen 7.8 percent over the past year."
"The index for household energy decreased 1.8 percent in March. The indexes for fuel oil and natural gas, which have been falling since last summer, continued to decline in March, with the fuel oil index falling 8.5 percent and the index for natural gas decreasing 4.8 percent. The electricity index turned down in March, falling 0.2 percent after rising 0.5 percent in February. The index for household furnishings and operations rose 0.3 percent in March. Over the past year, the housing index has risen 1.4 percent, with the shelter index up 1.5 percent and the household energy index down 0.5 percent."
"The index for transportation declined 1.1 percent in March after rising 1.9 percent in February. The gasoline index, which rose 8.3 percent in February, declined 4.0 percent in March. (Prior to seasonal adjustment, gasoline prices rose 1.0 percent in March.) The index for new and used motor vehicles was virtually unchanged in March, as a 0.6 percent increase in the new vehicles index offset a 1.7 percent decline in the index for used cars and trucks. The index for public transportation declined 1.0 percent in March as the airline fare index fell 2.3 percent. This was the seventh straight monthly decline for the airline fares index; it has decreased 7.7 percent over the last 12 months. The transportation index has declined 13.1 percent since March 2008, with the index for gasoline down 39.3 percent."
Other Expenditure Group Prices
"Among other CPI groups, the index for apparel turned down in March, declining 0.2 percent after rising 1.3 percent in February. (On a not seasonally adjusted basis, apparel prices rose 3.1 percent in March and were up 1.4 percent over the past year.) The medical care index rose 0.2 percent in March and has increased 2.8 percent over the past year. The index for recreation was virtually unchanged in March and was up 1.7 percent over the past year. The index for education and communication rose 0.2 percent in March, with the education index up 0.5 percent and the communication index virtually unchanged. The index for other goods and services rose 2.7 percent in March due to the 11.0 percent increase in the tobacco and smoking products index."
Year-to-Date Price Changes
"For the first three months of 2009, consumer prices increase at a seasonally adjusted annualized rate (SAAR) of 2.2 percent. This compares to a 0.1 percent increase for all of 2008. The index for energy, which fell 21.3 percent in 2008, advanced at a 7.9 SAAR in the first quarter of 2009. Petroleum-based energy costs rose at a 29.1 percent rate and energy services decreased at an 8.5 percent rate. The food index fell at a SAAR of 0.8 percent in the first quarter of 2009 after rising 5.9 percent during 2008. The food at home index, which rose 6.6 percent during 2008, fell at a 3.6 percent SAAR in the first quarter of 2009."
"Excluding food and energy, the CPU-U rose at a 2.2 percent SAAR during the first quarter of 2009, after increasing 1.8 percent during 2008. Advances during the first quarter in the indexes for tobacco, new vehicles, medical care, and apparel contributed to the rise, while declines in the indexes for lodging away from home and public transportation mitigated the increase."
Comparing the CPI and Other Macroeconomic Data
It is sometimes instructive to find relationships between various macroeconomic data. These relationships may sometimes give us a more broad picture of the economy. For instance, there is a general relationship between output (GDP) and employment. As GDP increases, employment tends to increase. In the past several months, as real GDP has decreased, the unemployment rate has increased. One piece of data confirms the meaning of the other. Figure 3 illustrates four sets of macroeconomic data - CPI, unemployment, real GDP growth and the federal funds rate. Notice the long term relationship of periods of output growth and decline with the changes in the unemployment rate. This relationship makes sense as the number of employed is directly related to output. Some increase in output can be attributed to improvements in productivity, but growth is very much dependent on labor force growth and employment. In late 2008, as U.S. real GDP declined, the unemployment rate increased substantially.
|Figure 3: Selected Macroeconomic Data, 1999-2009|
|Year||Real GDP Change
|Fed Funds Rate Target
*Unemployment data is for March, 2009
Business cycles, periodic fluctuations in growth and employment, illustrate the relationships of some data (see Figure 4). When the National Bureau of Economic Research (NBER) tracks cycles in order to identify recessions, they use the combination of employment, GDP growth and other factors. How do consumer prices fit into this analysis? The NBER uses real GDP growth and real personal income as primary factors identifying business cycles. Using employment and income data adjusted for inflation allows the NBER to make more accurate comparisons from one data period to the next.
Inflation and GDP
Accurate measurement of gross domestic product or GDP growth is also dependent on the accurate measurement of inflation. A rise in the price level "inflates" the measurement of GDP growth - miscalculating real growth in the economy. A more meaningful measurement of the growth of output is real GDP - the nominal GDP measurement adjusted for the impact of inflation. Although CPI is the most common measurement of inflation for many uses, the adjustment of GDP uses a process based on the GDP deflator. Both the CPI and the GDP deflator are measurements of average prices, but the GDP deflator includes all of the goods and services produced in the economy, not just the CPI market basket. The GDP is the market value of all goods and services produced in a year. Real GDP is the market value of those goods at a constant price level. Measuring the nation's output in a year at a constant price level means that you can accurately compare it to the output in another year.
CPI vs. GDP Deflator as Measures of Inflation
The rate of inflation rate determined by the CPI and GDP deflator are normally quite similar. Since the CPI uses a fixed market basked of goods and services, it assumes a fairly constant pattern of consumer purchases. Over time, the market basket may be changed, based on changes in consumer behavior. The GDP deflator uses a flexible basket of goods and services based on the actual quantities of goods and services produced in a year, while the prices of the goods and services are fixed. The GDP deflator uses a much larger quantity of goods and services.
The CPI does not take into account substitution - the tendency of consumers to choose lower priced goods in place of more expensive ones. Just the opposite sometimes happens, as consumers may choose to purchase more expensive goods as their incomes increase. The GDP deflator can take these substitutions into account. Because the GDP delator assumes substitutions, it may underestimate the impact of inflation when consumers do not (are not able to) substitute. The CPI may overestimate the impact of inflation when consumers do substitute.
Most government agencies and many private contracts use the CPI to determine a cost of living adjustments (COLA). The Social Security Administration added a 5.8 percent COLA to Social Security benefits and SSI payments in January 2009, based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2007 to the third quarter of 2008. If there had been no increase in the CPI in that time period, there would have been no increase in benefits.
Inflation and Unemployment
Long-standing economic theory had assumed that there is a predictable trade-off between the impact of public policy decisions and economic change on inflation and unemployment. This theory, developed by New Zealand Economist William Phillips in 1958, was based on his observation of an inverse relationship between money wage changes (inflation) and unemployment in the British economy over a period of time. The "Phillips Curve" proposed that when unemployment is low, inflation tends to be high and when unemployment is high, inflation tends to be low.
The implication for policy makers was that "Keynesian" policies could be used to control unemployment and inflation. Increased spending can lower unemployment with the risk of a high rate of inflation. Policy makers face the Phillips Curve trade-off. Today, policy makers who propose to use monetary policy (lower interest rates) or fiscal policy (deficit spending) to stimulate the economy ,and increase GDP and employment, are aware of its potential inflationary effect. The Phillips Cure theory lost favor in the late 1980s when there were periods of both high unemployment and high inflation, followed in the 1990s by periods of low unemployment and low inflation. The Federal Reserve recognized the potential trade-off in its most recent monetary policy statement when it justified an aggressive stimulatory policy by saying that the current conditions did not include an inflationary threat. Low inflation provides room for aggressive policies to stimulate the economy. Should inflation become a real threat, the Fed may slow down growth of the money supply.
Have your students click the start button below to complete a multiple choice assessment of the March 18 BLS "Consumer Price Index" announcement.
- How important is it to adjust economic growth or income data for the effect of inflation?[Adjusting for inflation allows for a more accurate comparison of one period to another. Using the CPI to determine real income growth gives a more accurate picture of purchasing power over time. Using the deflator to determine real GDP growth gives a better picture of actual output, not just the value that can be inflated by the price level change. "Real" data privide a consistent base for comparisons and measurment of "real" growth.]
CONCLUSION"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955."
Has the trend of lower prices in the U.S. reversed? Although the price level over the past year declined by 0.4 percent, the last few months have seen price level increases. Lower prices are predictably a result when consumer demand decreases. If consumer demand and employment continue to decrease, and the recession continues, will prices fall? Watch for next month's real GDP and employment data to predict what might happen to consumer prices.
The BLS tracks a variety of international data, including prices. Take a look at some of the international data.
Go to "Consumer Price Indexes in Nine Countries, Percent Change From Same Period of Previous Year, 1995-2009 ." Read the inflation data about the nine industrialized nations.
- Do you see any patterns?
- Which nations have had higher inflation rates than the U.S.? Lower rates?
- What do you think may account for the differences?
Go to "U.S. Import and Export Price Indexes, March 2009 ." Read about the price changes for U.S. imports and exports.
- How much have import and export prices changed compared to U.S. domestic prices?
- What imported goods have had the greatest price increases recently? Exports?
- Which nations' goods have increased in prices the most? Least?