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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported October 15, 2009, by the U.S. Bureau of Labor Statistics (BLS) for the month of September, 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, Consumer Price Index (CPI), Inflation, Macroeconomic Indicators, Money Supply, Price Stability, Trade-offs among Goals

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 November 10, 2014

Inflation

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.

Employment and Unemployment

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.

Real GDP

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.

Federal Reserve

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.

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 October 15, 2009, BLS press release of data on the consumer price index for the month of September, 2009.

[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 first semester of this school year (September-January), 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.

  • September: CPI and inflation (deflation) basics: What is the CPI? What is inflation and deflation? How are they measured? What do they mean?
  • October: Details and issues about the measurements and meaning of the measurements of the price level, adding additional concepts. (THIS LESSON)
  • November: Detailed breakdown of the data by region and other criteria (trends, identifying trends and comparisons of regions and demographic groups).
  • December: The relationships of CPI and inflation data to other economic data, such as GDP, employment. etc. and the business cycle. 
  • January: School year-end review and analysis.]

RESOURCES


Key Economic Indicators

as of October 15, 2009

Inflation

On a seasonally adjusted basis, the CPI-U increased 0.2, percent in September after rising 0.4 percent in August. The index for all items less food and energy increased 0.2 percent in September after increasing 0.1 percent in August.

Employment and Unemployment

U.S. nonfarm payroll employment decline by 263,000 jobs in September and the unemployment rate increased to 9.8 percent. The largest job losses were in construction, manufacturing, retail trade, and government.

Real GDP

U.S. real gross domestic product decreased at an annual rate of 0.7 percent in the second quarter of 2009. In the first quarter of 2009, real GDP decreased 6.4 percent.

Federal Reserve

The Federal Open Market Committee (FOMC) kept the target range for the federaal funds rate at 0 to 1/4 percent.

PROCESS

October 15, 2009 BLS Announcement: Consumer Price Index, September 2009

"On a seasonally adjusted basis, the CPI-U increased 0.2, percent in September after rising 0.4 percent in August. The index for all items less food and energy increased 0.2 percent in September after increasing 0.1 percent in August."

The rate of inflation in September did not receive much attention from the national media.  The 0.2 percent increase was well within the norm and expectations.  An October 15, 2009, New York Times article named Consumer Prices Edged Up Last Month concerning the BLS announcement said,  "The report demonstrated that inflation was still a remote concern for the American economy, even as the dollar tumbles against other global currencies and jittery investors clamor to buy oil and gold. The figures backed up the Federal Reserve's view that inflation will remain low as the economy grapples with high unemployment and low consumer demand."

The BLS commented on the highlights of the September inflation data, "The seasonally adjusted increase in the all items index was broad based, although tempered by a decline in the food index. The all items less food and energy index increased 0.2 percent in September after increasing 0.1 percent in each of the previous two months.  Contributing to this increase were advances in the indexes for lodging away from home, medical care, new vehicles, used cars and trucks, and public transportation. The increase occurred despite declines in the indexes for rent and owners' equivalent rent, the first decreases in those indexes since 1992. The energy index also increased in September, as increases in the indexes for gasoline, fuel oil and electricity more than offset a decline in the index for natural gas.

Highlights: Consumers paid less for food, but slightly more for energy, gasoline and clothing.

"In contrast to these increases, the food index declined, falling for the sixth time in the last eight months.  The index for food away from home increased, but the food at home index declined as the indexes for fruits and vegetables and for meats, poultry, fish and eggs fell sharply. Both the food and energy indexes have declined over the past 12 months. The decline in the food index is the first 12-month decrease in that index in over 40 years."

Consumer Price Index Data for September 2009

Food - "After rising 0.1 percent in August, the food index declined 0.1 percent in September. The index for food away from home rose 0.1 percent while the food at home index declined 0.3 percent, its eighth decline in the last 10 months. ... Over the past year, the food at home index has decreased 2.5 percent, with the fruits and vegetables, dairy, and meat groups all posting significant declines. The food index has declined 0.2 percent since September 2008, the first 12-month decrease since April 1967."

Energy - "The energy index rose 0.6 percent in September after increasing 4.6 percent in August. The index for energy commodities rose 1.1 percent, with the gasoline index increasing 1.0 percent. (Before seasonal adjustment, gasoline prices fell 2.1 percent in September.) ... Over the past 12 months, the energy index has fallen 21.6 percent with all its major components declining. The gasoline index decreased 29.7 percent, the index for natural gas declined 28.0 percent, and the electricity index fell 0.1 percent."

All Items Less Food and Energy - "The index for all items less food and energy rose 0.2 percent in September after increasing 0.1 percent in both July and August. One contributor to the increase was the medical care index, which rose 0.4 percent in September. ... For the past 12 months, the index for all items less food and energy has risen 1.5 percent. The indexes for shelter, new vehicles, medical care and tobacco have all risen during the period, while the indexes for used cars and trucks and public transportation have declined."

Figure 1 breaks down the September 2009 seasonally adjusted CPI-U data by product group.  It also reports the change from September 2008 to September 2009.  Notice the significant decreases in some product groups in the past year, especially energy.
 

Figure 1:   Percent Change in CPI-  All Urban Consumers
U.S. City Average
September 2009
  Sept. 2009 12 mos.
Sept. - Sept.
All Items .2 -1.3
     Food -0.1 -0.2
     Food at home -0.3 -2.5
     Food away from home 0.1 2.6
     Energy 0.6 -21.6
     Energy Commidities 1.1 -30.1
     Gasoline 1.0 -29.7
     Fuel Oil 1.5 -36.0
     Energy Services 0.1 -8.0
     Electricity 0.6 -0.1
All items less food and energy 0.2 1.5
      New vehicles 0.4

1.6

      Used cars and trucks 1.6 -2.7
      Apparel 0.1 1.1
      Medical care commodities 0.6 4.1
      Shelter 0 .7
      Transportation services .7 2.0
      Medical care services .4 3.3

What is Seasonal Adjustment?

"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." Source:  BLS, Fact Sheet on Seasonal Adjustment in the CPI

Not Seasonally Adjusted CPI Measures

According to the BLS, "Those who use the CPI in escalation agreements to adjust payments for changes in prices should typically not use seasonally adjusted indexes. Unadjusted indexes are used extensively for escalation purposes because they measure the change in actual prices consumers pay for goods and services. Many collective bargaining contract agreements and pension plans, for example, tie compensation changes to the Consumer Price Index unadjusted for seasonal variation."

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.3 percent over the last 12 months to an index level of 215.969 (1982-84=100). For the month, the index increased 0.1 percent prior to seasonal adjustment.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) decreased 1.7 percent over the last 12 months to an index level of 211.322 (1982-84=100). For the month, the index increased 0.1 percent prior to seasonal adjustment.

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) decreased 1.4 percent over the last 12 months. For the month, the index increased 0.1 percent on a not seasonally adjusted basis.

Note: Indexes for the post-2007 period may be subject to revision at some time in the future.

The BLS uses several different measures of the CPI for specific reasons. Each is appropriate for given demographic groups.

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


The all urban consumer group represents 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. The CPI for All Urban Consumers (CPI-U) is the index most often reported by the national media.

Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is based on the expenditures of households included in the CPI-U definition that also meet two requirements: more than one-half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. The CPI-W population represents about 32 percent of the total U.S. population and is a subset, or part, of the CPI-U population. The CPI for Urban Wage Earners and Clerical Workers (CPI-W) is the index most often used for wage escalation agreements.

The CPI inflation calculator allows customers to calculate the value of current dollars in an earlier period, or to calculate the current value of dollar amounts from years ago.

Consumer price indexes often are used to escalate or adjust payments for rents, wages, alimony, child support and other obligations that may be affected by changes in the cost of living. There is a fact sheet explaining how to use the CPI for escalating contracts.

Chained Consumer Price Index for All Urban Consumers (C-CPI-U)

The C-CPI-U supplements the other two CPI indexes. The C-CPI-U is designed to more closely resemble a true "cost-of-living index" by taking into account observed consumer behavior, technological changes, and product substitutions. The C-CPI-U is chained monthly, using expenditure data to average price changes across item categories between a base period (1999, initially) and the current period. Data are national, not seasonally adjusted, and subject to revision.

The CPI may not be applicable to all population groups. For example, the CPI-U is designed to measure inflation for the U.S. urban population and thus may not accurately reflect the experience of people living in rural areas. Also, the CPI does not produce official estimates for the rate of inflation experienced by subgroups of the population, such as the elderly or the poor.

Recent History of the Consumer Price Index

Since 2000, the U.S. economy has experienced  relatively low annual rates of inflation. The "wild card" has been energy prices. which have fluctuated much more widely than the overall price level.  In the last quarter of 2008, the CPI-U dropped 3.3 percent and 1.3 percent from September 2008 to September 2009.  2009 has seen very low monthly increases in the CPI. Figure 1 show the monthly changes in the CPI-U from 2002 through September 2009. Note the erratic pattern of changes month to month. Many of the shifts from increase to decrease and decrease to increase reflect short-term changes in energy prices.


Figure 2 CPI

Producer Price Index (PPI)

The Producer Price Indexes (PPIs) are a group of price indexes that measure changes in the selling prices received by domestic producers of goods and services. They formerly were referred to as Wholesale Price Indexes. When the PPIs are released, the news media will most often report the percentage change in the Index for Finished Goods.

On October 20, 2009, the BLS reported on the producer price index from the month of September, 2009.  "The Producer Price Index for Finished Goods declined 0.6 percent in September, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 1.7-percent rise in August and a 0.9-percent decline in July. In September, at the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.2 percent and the crude goods index fell 2.1 percent. On an unadjusted basis, from September 2008 to September 2009, prices for finished goods fell 4.8 percent, the tenth consecutive month of year-over-year declines."

Producer prices declined in September and fell slightly more than consumer prices over the last year.

The Gross Domestic Product (GDP) Deflator

The GDP deflator (also called the implicit price deflator (IPD) is a measurement of inflation that tells how much the price of all goods and services included in GDP have increased. GDP includes consumer goods and services and also machinery and equipment bought by firms, purchases of goods and services by government, and the impact of exports and imports. The "deflator" is the ratio of the current-dollar value of a series, such as gross domestic product (GDP), to its corresponding chained-dollar value, multiplied by 100. In other words, the GDP figures are adjusted for inflation using the deflator.

The Bureau of Economic Analysis uses the raw data on production to estimate nominal GDP (GDP in current dollars). The BEA then adjusts the data for inflation to arrive at "real GDP." 

The CPI, Inflation and the Cost of Living

A BLS online publication, "Frequently Asked Questions:  Is the CPI a Cost of Living Index? ," explains the relationship of the CPI to inflation and the cost of living.

"The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies."

"The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, and not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework."

[Note to teacher: The "Virtual Economics" CD includes a basic explanation of "inflation" through a video clip. If you have a copy of "Virtual Economics," open the "Browse Economics Concepts" section and click on the key word "inflation" in the macroeconomics section.] 

The "Core" Rate of Inflation and the "Headline" Rate

"The 'core' CPI measurement represents changes in the consumer price index minus items which typically fluctuate widely from month to month - food and energy.  From the October 15 BLS announcement: " The index for all items less food and energy rose 0.2 percent in September after increasing 0.1 percent in both July and August." 

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 was 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.

The "headline" rate - the rate reported in the media includes energy and food. Adding the more volatile energy and food prices often shows greater rates of change. In some cases, a drop in energy prices added to inflation in other categories will end up showing a net "no change." The headline rate in September included the following energy and food price data.

"The energy index rose 0.6 percent in September after increasing 4.6 percent in August.."

"After rising 0.1 percent in August, the food index declined 0.1 percent in September."

Calculating the Rate of Inflation Over a Period of Time

The CPI Inflation Calculator allows customers to calculate the value of current dollars in an earlier period, or to calculate the current value of dollar amounts from years ago. The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households. This index value has been calculated every year since 1913. For the current year, the latest monthly index value is used.

Consumer price indexes often are used to escalate or adjust payments for rents, wages, alimony, child support and other obligations that may be affected by changes in the cost of living. Escalation agreements often use the CPI—the most widely used measure of price change—to adjust payments for changes in prices. The most frequently used escalation applications are in private sector collective bargaining agreements, rental contracts, insurance policies with automatic inflation protection, and alimony and child support payments.

Here is a link to an online fact sheet explaining How to Use the Consumer Price Index for Escalation .

Open the calculator and put in the time period since your year of birth to today. How much inflation have we experienced in your lifetime? If your parents bought a new car for $15,000 the year you were born, what would that car cost in today's dollars?

The BLS has published an online reading, "The Consumer Price Index —Why the Published Averages Don't Always Match An Individual's Inflation Experience ." This may answer some of your questions about your experiences with price level changes.

Additional Information about the CPI: 

ASSESSMENT ACTIVITY


Essay Question:

How does inflation impact your life?
 

CONCLUSION

The BLS reported that the CPI-U (seasonally adjusted) increased 0.2, percent in September after rising 0.4 percent in August. The rate of inflation moderated slightly in September as the slow economic recovery failed to put pressure on prices. The "core'' index, all items less food and energy, increased 0.2 percent in September after increasing 0.1 percent in August. Lower food prices offset higher energy prices so that the increase in the CPI-U and core rate of inflation were the same.

Inflation is generally not considered to be a serious threat in the near future. Some analysts say that pressures from economic recovery may bring back the need to fight inflation - possibly resulting in policies to raise interest rates and decrease the money supply. Many say that inflation is a natural result of growth as available resources are consumed, and as employment and incomes rise. This recovery may follow the traditional pattern or it may present a new combination of economic effects. Time will tell.
 
[Teachers: This may be an opportunity to introduce the long-held theory of the trade-off between inflation and unemployment - the Phillips Curve, illustrating an inverse relation between the rate of unemployment and the rate of inflation in an economy. The lower the unemployment rate in an economy, the higher the rate of increase of wages (inflationary pressures.) in the economy. In recent times, the U.S. economy has experienced periods of both inflation and unemployment (stagflation) and periods of low inflation and low unemployment (early 2000s)].

EXTENSION ACTIVITY

The BLS provides more detailed information about how price level changes are measured for different demographic groups, sectors, and specific product groups.

One resource that may be of interest to students is the BLS online publication, "How BLS Measures Price Change for College Tuition and Fees in the Consumer Price Index ."

Take a look at the reading.  How might the prospect of inflation impact your post-high school plans?