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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported May 15, 2009, by the U.S. Bureau of Labor Statistics (BLS) for the month of April, 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.

KEY CONCEPTS

Causes of Inflation, Deflation, Inflation, Macroeconomic Indicators, Price Stability, Real vs. Nominal

STUDENTS WILL

  • 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 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 May 15, 2009, BLS press release of data on the consumer price index.for the month of April, 2009.

[Note to teacher: You can subscribe to receive monthly BLS email news releases. To subscribe, go to the BLS News Service Subscription Page .]


[Note to teacher: 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. 
  • May: School year-end review and analysis. THIS LESSON.]

MATERIALS


Key Economic Indicators

as of May 15, 2009

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in April before seasonal adjustment. This index has fallen 0.7 percent over the last 12 months, due primarily to a 25.2 percent drop in energy prices. The year-over-year declines in March and April are the first since 1955.

Employment and Unemployment

Nonfarm payroll employment continued to decline by 539,000 jobs in April and the unemployment rate rose from 8.5 to 8.9 percent. Since the recession began in December 2007, 5.7 million jobs have been lost. In April, job losses were large and widespread across nearly all major private-sector industries. Overall, private-sector employment fell by 611,000.

Real GDP

Real gross domestic product decreased at an annual rate of 6.1 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to advance estimates. In the fourth quarter, real GDP decreased 6.3 percent.

Federal Reserve

The FOMC will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Federal Reserve has committed to employ all available tools to promote economic recovery and to preserve price stability.

PROCESS

May 15, 2009 BLS Announcement: Consumer Price Index: April 2009

Consumer Prices Index for All Urban Consumers (CPI-U)

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in April before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This index has fallen 0.7 percent over the last 12 months, due primarily to a 25.2 percent drop in energy prices. The year-over-year declines in March and April are the first since 1955."

Figure 1 shows the monthly changes in the CPI-U for the major expenditure categories from March 2009 to April 2009 and the one-year change from April 2008 to April 2009.  Note the significant decreases in transportation and energy prices in the last year.  Remember, gasoline prices have decreased from highs of over $4.00 per gallon in mid-2008.

Figure 1: Changes in the Consumer Price Index (CPI-U) by Expenditure Category
Expenditure Category (CPI-U) % Change from Mar to Apr 2009 % Change from Apr '08 to Apr '09
All Items 0 -0.7
   Food and beverages -0.2 3.3
   Housing -0.1 1.0
   Apparel -0.2 0.9
   Transportation -0.4 -13.4
   Medical Care 0.4 3.0
   Recreation -0.4 1.2
   Educ. and Comm. 0.3 3.4
   Other goods/Services 2.6 7.9
Special Indexes:    
   Energy -2.4 -25.2
   Food -0.2 3.3

   Core - All Items
       Less food/energy

0.3 1.9

[NOTE: The BLS measurement of the CPI-U includes all urban consumers, representing 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. Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals."  Source:  Whose Buying Habits Does the CPI Reflect? .]

[Note to teachers:  Students can discuss which prices they have noticed increasing or decreasing in the past year or month. Their experiences will depend on their buying habits.  They may not notice furniture prices, but they will notice gasoline prices.]

"On a seasonally adjusted basis, the CPI-U was unchanged in April after declining 0.1 percent in March. The energy index declined for the second straight month, falling 2.4 percent after declining 3.0 percent in March. The indexes for motor fuel, fuel oil, natural gas, and electricity all declined in April. The food index declined as well, falling 0.2 percent in April after a 0.1 percent decrease in March. The index for food away from home increased, but the food at home index fell 0.6 percent with none of the six major grocery store food groups posting an increase. Over the past year, the food index has risen 3.3 percent while the energy index has declined 25.2 percent."

[NOTE: According to the BLS, "many economic series, including the CPI, are adjusted to remove the effect of seasonal influences-those which occur at the same time and in about the same magnitude every year. Among these influences are price movements resulting from changing weather conditions, production cycles, changeovers of models, and holidays."]

The BLS announcement added details about the distribution of price changes among product groups.  "Offsetting the declines in the food and energy indexes was a 0.3 percent increase in the index for all items less food and energy. Over 40 percent of the increase was due to a second consecutive large increase in the tobacco index. The index rose 9.3 percent in April as an increase in the federal excise tax on cigarettes went into effect. A larger increase in the index for medical care, an increase in the index for new vehicles, and an upturn in the lodging away from home index also contributed to the April increase. The index for all items less food and energy has risen 1.9 percent over the past year."

[NOTE: The term "core CPI" refers to the CPI-U for All Items Less Food and Energy. According to the BLS, this measurement of price level change  "is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks that cannot be damped through monetary policy. However, all consumer goods and services, including food and energy, are represented in the headline CPI (included food and energy)."]

[Note to teachers:  Which is a better long-term measurement of the consumer price level -t he "headline" or "core" CPI?  How important are energy prices over time?]

"The food and beverages index declined 0.2 percent in April following a 0.1 percent decrease in March. A 0.3 percent increase in the food away from home index was more than offset by a 0.6 percent decline in the food at home index and a 0.1 percent fall in the index for alcoholic beverages. This was the fifth consecutive decline in the food at home index and it has declined 1.6 percent since its November peak."

"The housing index fell 0.1 percent in April, the same decline as in March. The shelter index, however, rose 0.2 percent in April after being unchanged the previous two months. The index for lodging away from home turned up in April, rising 0.5 percent after falling in each of the six previous months. The indexes for rent and owners' equivalent rent rose 0.2 percent and 0.1 percent, respectively."

"The index for transportation fell 0.4 percent in April after declining 1.1 percent in March. Following a 4.0 percent decrease in March, the gasoline index declined 2.8 percent in April. (Prior to seasonal adjustment, gasoline prices rose 5.3 percent in April.)"

"The index for public transportation declined for the eight straight month, falling 0.8 percent as the airline fare index declined 1.5 percent. The transportation index has decreased 13.4 percent since April 2008, with several of its components declining over the period."

"Among other CPI groups, the index for medical care rose 0.4 percent in April after a 0.2 percent increase in March as the indexes for prescription drugs and hospital services posted larger increases. The index for education and communication rose 0.3 percent in April with education index up 0.4 percent and the index for communication rising 0.1 percent. The index for other goods and services posted another sharp increase due to higher tobacco prices, rising 2.6 percent in April.  The indexes for recreation and apparel both declined in April, falling 0.4 percent and 0.2 percent, respectively."

What is the Current Level of the CPI-U?

The CPI is an index, measuring the change from a base period. The current base period of the CPI-U when the price of the "market basket" of goods and services was $100, is the 1982-84 period (averaged). The current index number of the CPI-U 213.240. That means that the market basket of goods and services that cost $100 in 1982-84 now costs $212.24. The basket cost $212.71 in March, 2009 and ;increased by 53 cents in the last month. The cost of the basket fell by 0.7 percent or $1.49 between April ,2008, and April, 2009, primarily reflecting the drop in energy prices during that time period.

Figure 2 shows the various spending categories of the CPI-U in April, 2009.  Each category is given a "weight," representing the estimated portion of the total market basket spent on that category. Each category includes a variety of individual items. For instance, the category of  "transportation" includes the price levels of new and used motor vehicles, motor fuel, motor vehicle parts and equipment, motor vehicle maintenance and repair, and public transportation.

Housing is, by far, the largest expenditure component - weighted 43.4 percent of the total basket value. Source: CPI Detailed Report Data for April 2009 .

Figure 2:  Consumer Price Index (CPI-U) Weights and Index Levels by Category (April 2009)
Spending Category Weight* Index Level
Food and beverage 15.8% 218.764
Housing 43.4% 217.374
Apparel 3.7% 123.208
Transportation 15.3% 171.987
Medical Care 6.4% 374.170
Recreation 5.7% 114.261
Education/Communication 6.3% 126.606
Other 3.4% 370.606
All Items 100% 213.240
*Weights established as of December 2008

[Note to teachers: Students may be interested in determining their own "weighted index." What percentage of their monthly expenses go to different spending categories? Are their "weights" similar to the BLS CPI-U market basket weights?]

Figure 3 shows the changes in the index levels for selected expenditure categories that have been larger and smaller than the total market basket price increase. In addition, it shows several new categories have been added since the establishment of the base-year period.

Figure 3:  Selected CPI Expenditure Category Index Level Changes
The price level increases since the 1982-84 base-year period have not been consistent across spending categories.  Some categories with price level increases greater than the average have been:
All good and services +113.2% (1982-84)
   Cereals and bakery products +152.7%
   Fruits and vegetables +174.8%
   Shelter +149.6%
   Rents +148.6%
   Fuel oil and other fuels +130.8%
   Auto maintenance and repair +142.1%
   Education books and supplies +372.5%
   Tuition and school fees +439.2%
   Misc. personal services +342.6%
   Medical care services +204.0%
   Hospital and related services +464.8%
Some product categories that have had significantly smaller price level increases since the 1982-84 base-year period have been:
Dairy products +97.1%
Non-alcoholic beverages +62.9%
Food away from home +55.1%
Men's and boys' apparel +17.2%
Women's and girls' apparel +11.9%
As the market basket and selective base years have been changed over time to reflect consumption patterns, some new categories have been added.  Examples are:
Information Technology +18.0% since 1988
Audio and video +2.3% since 1997
Tenant/household insurance +29.7% since 1997
New and used vehicles -7.6% since 1997
Personal consumption +14.0% since 2007

The chart in Figure 4 shows the monthly changes in the CPI-U from January 2002 through April 2009.  Notice the irregular upward and downward spikes in CPI changes.  In the period of 2002 to mid-2005, consumer prices were relatively stable compared the mid-2005 to 2009 period of time.  Many of the CPI spikes can be attributed to more volatile crude oil prices.  Factoring out more volatile energy and food prices (the core index) provides a graph with fewer and less pronounced spikes.

Inflation Figure 4

You can use the BLS "Inflation Calculator" to determine price level change over any period of time (beginning in 1913) or to determine the buying power of the dollar at any given time compared to another. For instance, $100 in 1913 had the same “buying power” as $2,153.94 in April 2009. A good that cost $100 in 1913 (all other things being equal) would cost $2,153.94 today.  If electronics prices had been consistent with the CPI-U over time an I-Pod that cost $200 today would have cost $77.28 in 1080 (if you could have bought an I-Pod in 1980).

Try the BLS Inflation Calculator to determine the historical price of something you might buy today.  Remember, prices of all expenditure categories have not changed at the same rate.  Any calculation you make with the calculator is based on the changes in the "CPI-U for all Items."

CONCLUSION

 For the first time in many years, the consumer price index had decreased over a one year period of time for two consecutive months.  The biggest contributor to the annual decline has been energy prices, which fell over 25 percent in the past year.  More recently, energy prices have risen somewhat, but not close to the level of mid-2008.  2008-9 is a good example of the impact that energy price changes can have on the CPI-U.  Those who promote the significance of the "Core CPI" will point to the last year or two as evidence that volatile energy prices may skew the measurement of the long-term price level.

Notice in the chart below the monthly changes in the CPI-U (not seasonally adjusted) from January 2008 to April 2009.  Inflation was moderate in the first half of 2008, followed a five month period of "deflation" or falling price level.  In early 2009, moderate inflation resumed. 

One Month Changes in CPI-U (not seasonally adjusted)

 

Month                                  Change in CPU-U

January 2008                     0.5%

February 2008                   0.3%

March 2008                         0.9%

April 2008                            0.6%

May 2008                             0.8%

June 2008                           1.0%

July 2008                             0.5%

August 2008                      -0.4%

September 2008               -0.1%

October 2008                     -1.0%

November 2008                -1.9%

December 2008                -1.0%    

January 2009                       0.4%

February 2009                     0.5%

March 2009                          0.2%

April 2009                             0.2% 

Annual Change, April 2008 to April 2009: -0.7%           

It can be argued that the falling price level from August to December 2008 was a direct result of falling demand for energy, commodities and consumer goods - resulting from the global recession.  Energy prices were a key component.   Energy prices have risen moderately in early 2009.

What results when prices unexpectedly change?  Uncertainty results.   Planners, businesses and others agree to contracts and investments based on expected returns - including some premium for anticipated inflation.  Unanticipated inflation hurts lenders and helps borrowers.  When borrowers or lenders are uncertain, they may choose not to act - not to invest - not to borrow.

In August to December, 2008, there were some fears of long-term deflation - a falling price level. Falling prices can have a similar deterring effect on business investors.  Some feared a downward price spiral.  When producers anticipate falling product prices, they are normally less willing to supply or invest in future output.  This idles some of the nation's productive capacity.  As investment also falls, it leads to further decrease in aggregate demand.  The spiral continues.

Fears of deflation have mostly ended, for now.  Low to moderate inflation has influenced the Federal Reserve to enact stimulatory policies without fear of rising prices.  Perhaps, this is some part of the economic stability we seek as we plan to end the recession.

[Note to teachers: What do you and your students think will happen over the summer of 2009?  Higher prices?  Lower prices?  Recovery?   More unemployment? 

Will the recession end?  Did the March-April rise in stock market prices tell us the economy was improving?]

ASSESSMENT ACTIVITY


Essay Question:

 

  1. How is the rate of inflation, as the percentage change in CPI from one period to the next, determined? [Subtract the CPI in the base period from the current measurement of CPI.  Divide the difference by the CPI base year measurement to determine the percentage change. CPI Year 1 = 100; CPI Year 2 = 105; 105 minus 100 = 5; 5 divided by 100 = .05 or 5 percent.]

EXTENSION ACTIVITY

The BLS also tracks and reports on producer prices, reported as the Producer Price Index (PPI) According to the BLS, "The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services. "  The PPI includes measurements of "crude" goods and "intermediate" goods.  The PPI for Finished Goods tracks the average change in prices over time of domestically produced and consumed commodities. The index is comprised of prices for both consumer goods and capital equipment, but excludes the prices of services.

The May 14, 2009 BLS announcement of the PPI for the month of April 2009 said, "The Producer Price Index for Finished Goods increased 0.3 percent in April, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  This rise followed a 1.2-percent decline in March and a 0.1-percent increase in February.  At the earlier stages of processing, prices received by producers of intermediate goods moved down 0.5 percent following a 1.5 percent decrease a month earlier, and the crude goods index advanced 3.0 percent after declining 0.3 percent in March.

Go to the BLS Producer Price Index Web Page .

Which measurement , CPI or PPI, do you think give us more meaningful information about price stability in the economy?