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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported November 18, 2009, by the U.S. Bureau of Labor Statistics (BLS) for the month of October, 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. This lesson includes a look at consumer prices in major U.S. metropolitan areas and how the prices of the expenditure groups are determined.

KEY CONCEPTS

Consumer Price Index (CPI), Inflation, Macroeconomic Indicators, Money Supply, Price Stability

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 November 18, 2009, BLS press release of data on the consumer price index for the month of October, 2009.

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.

MATERIALS


Key Economic Indicators

as of November 18, 2009

Inflation

On a seasonally adjusted basis, the U.S. Consumer Price Index for All Urban Consumers (CPI-U) rose 0.3 percent in October. The index has decreased 0.2 percent over the last 12 months on a not seasonally adjusted basis.

Employment and Unemployment

In October, the U.S. unemployment rate rose to 10.2 percent, the highest since April 1983, and nonfarm payroll employment continued to decline by 190,000 jobs. The largest job losses over the month were in construction, manufacturing, and retail trade.

Real GDP

U.S. real gross domestic product increased at an annual rate of 3.5 percent in the third quarter of 2009, according to the "advance" estimate of real GDP released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

Federal Reserve

The FOMC will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

PROCESS

The November 18, 2009 BLS report on the Consumer Price Index for the Month of October 2009

The threat of any substantial level of inflation seems very remote according to the Federal Reserve System's Federal Open Market Committee (FOMC), and that conclusion is backed up by the November 18, 2009, Bureau of Labor Statistics announcement of the consumer price index for October 2009. The "wild card" for consumer prices remains energy - more specifically, the price of gasoline.

"On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.3 percent in October, the U.S. Bureau of Labor Statistics reported today. The index has decreased 0.2 percent over the last 12 months on a not seasonally adjusted basis." Monthly changes in the CPI-U have been erratic over the past several months, ranging from a 0.7 percent increase in June to no change in both April and July.  The seasonally adjusted CPI-U had increased by 0.4 percent in August 2009 and increased by 0.2 percent in September 2009.  Again, the most important factor, month-to-month, has been energy prices.

The BLS report explained the impact of energy prices and a few other product groups on the overall price level.

 

"The seasonally adjusted all items increase largely reflected advances in the indexes for energy and for new and used motor vehicles. The energy index rose for the fifth time in the last six months, advancing 1.5 percent as the indexes for gasoline, fuel oil, natural gas, and electricity all increased. The index for all items less food and energy rose 0.2 percent in October, the same increase as in September. The indexes for used cars and trucks and for new vehicles both rose sharply and together they accounted for over 90 percent of the increase in the index for all items less food and energy. The indexes for airline fares and medical care also increased, while the shelter index was unchanged and the indexes for apparel and recreation declined."


Another key factor in recent times has been food prices. The BLS report commented..."The food index also increased in October, rising 0.1 percent after declining in two of the previous three months. The index for food away from home increased slightly, while the food at home index was unchanged. Within the food at home group, the index for dairy and related products rose significantly, while the fruits and vegetables index declined for the fourth straight month."


Summary of the Consumer Price Index Data for October 2009

Food - The food index rose 0.1 percent in October after declining 0.1 percent in September. The index for food away from home increased 0.1 percent while the food at home index was unchanged. Over the past 12 months, the food index has declined 0.6 percent with the food at home index down 2.8 percent.

Energy - The energy index rose 1.5 percent in October after increasing 0.6 percent in September. The index for energy commodities rose 1.9 percent, with the gasoline index increasing 1.6 percent.  Over the past 12 months, the energy index has fallen 14.0 percent with the gasoline index declining 17.9 percent.

All items less food and energy - The index for all items less food and energy rose 0.2 percent in October, the same increase as in September. Most of the advance was due to increases in transportation indexes. For the past 12 months, the index for all items less food and energy has risen 1.7 percent.

Figure 1, below, shows the details of the October 2009 CPI-U by expenditure group.  Notice the increases in the energy group, including the large increase of 6.3 percent in fuel oil prices.  Also notice the 3.4 percent increase in new and used automobiles.

Figure 1:  Percent Changes in CPI for All Urban Consumers (CPI-U)
U.S. City Average
Seasonally Adjusted changes from preceding month.
  Aug.
2009
Sept.
2009
Oct.
2009
Unadjusted
12 months ended
Oct. 2009
All Items(inc. food & energy) .4 .2 .3 -.2
     Food .1 -.1 .1 -.6
        Food at home .0 -.3 .0 -2.8
        Food away from home .1 .1 .1 2.2
     Energy 4.6 .6 1.5 -14.0
        Energy commodities 8.5 1.1 1.9 -18.7
           Gasoline (all types) 9.1 1.0 1.6 -17.9
           Fuel oil 6.2 1.5 6.3 -26.3
        Energy services .0 .1 .9 -7.1
           Electricity -.1 .6 .6 -0.6
           Utility (piped) gas service .4 -1.7 1.9 -24.0
     All items less food & energy .1 .2 .2 1.7
        Commodities less food &
            energy commodities
-.3 .3 .4 2.3
        New vehicles -1.3 .4 1.6 3.8
        Used cars and trucks 1.9 1.6 3.4 2.3
        Apparel -.1 .1 -.4 1.4
        Medical care commodities .5 .6 .2 4.3
     Services less energy services .2 .1 .1 1.5
        Shelter .1 .0 .0 .7
        Transportation services .6 .7 .4 2.7
        Medical care services .2 .4 .2 3.2

Not seasonally adjusted CPI measures

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent over the last 12 months to an index level of 216.177 (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 0.3 percent over the last 12 months to an index level of 211.549 (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 0.5 percent over the last 12 months. For the month, the index increased 0.1 percent on a not seasonally adjusted basis. Please note that the indexes for the post-2007 period are subject to revision.

Figure 2, below, shows the monthly changes in the CPI-U beginning in January 2002 through October 2009. Notice the high spikes in September 2005 and June 2008.  These are the result of large energy price increases in those months.

Figure 2 Inflation
Figure 3, below, shows the CPI-U and the CPI-U less energy and food (the core rate) for the last year, October 2008 to October 2009.  Notice the impact in fuel and food price changes in some months - largely resulting in the difference between the two measurements of the rate of inflation. 

  1. Make a list of the goods and services you purchase regularly (gasoline, food, clothes, entertainment, etc.) - Create 6-8 categories of goods and services.

  2. Pick one "unit" of a product from the various categories for your "market basket."

  3. Identify the current price of that unit of the good or service.

Examples:

Category

Unit

Unit Price

Basket Price

Energy

10 gal of regular gasoline

$1.99

$19.90

Entertainment

2 "first run" move ticket

$7.50

$15.00

Food

2 #3 "Extra Value" Meals

$5.75

$5.75

Clothing

1 pair of Levis 501 jeans

$35.00

$35.00

  1. Add the total cost of the items in your "market basket."   (For example, your market basket may cost $125.00 for all of the items (total number of each unit times the price.)

  2. Make the current price of the basket the "base" by designating it as 100.

  3. A month (or a year) from now, go back to the various stores and check the prices of the same items in the "market basket." Suppose the same items now cost $129.00. The price of the basket has increased by $4.00.

  4. Using this example, what has been your rate of inflation? A $4 increase from $125 to $129 is a 3.2% increase. (4/125 = .032) Your rate of inflation during that period was 3.2%.

  5. Determine the rate of inflation for your market basket. If you wait one month, you can multiply the monthly increase by 12 to determine an approximate annual increase (assuming that the prices rise at about the same rate each month).

  6. This will give you an idea of how a "market basket" price index works. Of course, you would normally have to measure the changes in the prices of your index items for a longer period of time to see much inflation.

  • What do you think has happened to the prices of the items in your "marker basket" in the past year? 

  • What do you think will happen to those prices in the coming year? 

  • Would taking the food and energy items out of your basket make a difference?

BONUS ACTIVITY:  How much have consumer prices changed since you were born?

Use the BLS "CPI Inflation Calculator " to determine how much the CPI has changed since the year you were born.

First, take a guess.  How much do you think consumer prices have changed in your lifetime? Put your year of birth into the calculator and hit "calculate" to find out the answer.

Common Misconceptions about the Consumer Price Index: Questions and Answers

An August 2008 Monthly Labor Review article by BLS economists John Greenlees and Robert McClelland reviews and analyzes some common misconceptions about the Consumer Price Index (CPI.) Those analyses are summarized in the BLS web page, "Common Misconceptions about the Consumer Price Index: Questions and Answers ."

Click on the link (underlined question) for answers.

  1. Has the BLS removed food or energy prices in its official measure of inflation?

  2. The CPI used to include the value of a house in calculating inflation and now they use an estimate of what each house would rent for -- doesn't this switch simply lower the official inflation rate?

  3. When the cost of food rises, does the CPI assume that consumers switch to less expensive and less desired foods, such as substituting hamburger for steak?

  4. Is the use of "hedonic quality adjustment" in the CPI simply a way of lowering the inflation rate?

  5. Has the BLS selected the methodological changes to the CPI over the last 30 years with the intent of lowering the reported rate of inflation?

  6. Does the Bureau of Labor Statistics calculate the CPI the same way as other nations? Do any differences in method keep the US CPI lower than the CPIs of those other nations?

Figure 3: Change in the U.S. CPI-U and CPI-U Less Food & Energy
October 2008 to October 2009
Month CPI-U
Monthly Change

CPI-U
Less Food & Energy
Monthly Change

October 2008 0.8 0.1
November 2008 -1.7 -0.2
December 2008 -0.8 -0.3
January 2009 0.3 0.3
February 2009 0.4 0.4
March 2009 -0.1 0.4
April 2009 0.0 0.2
May 2009 0.1 0.0
June 2009 0.7 0.1
July 2009 0.0 0.0
August 2009 0.4 0.1
September 2009 0.2 0.2
October 2009 0.3 0.3

Finding Additional Data and Details in the BLS Report

The monthly BLS CPI report includes links to additional price level data, including expenditure categories, regional and metropolitan area price data.  The price level data is reported for the four U.S. regions and for twenty-seven metropolitan areas.  Metropolitan area data is reported monthly, bi-monthly or semi-annually, depending on the size of the area.  Data for five large cities/metro areas  - New York, Philadelphia, Washington DC, Chicago and Los Angeles - is reported monthly.

Data for the U.S. geographic regions is reported monthly or bi-monthly.  The states in the four U.S. regions (as defined by the BLS Regional Offices) are:

  • Northeast - Connecticut, Maine, Massachusetts, New Hampshire, New York, New Jersey, Pennsylvania, Rhode Island, and Vermont.
  • Midwest - Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. 
  • South - Alabama, Arkansas, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, West Virginia, and the District

    of Columbia.

Go to the BLS pages, Consumer Price Index News Releases Issued by BLS Regional Information Offices .  Click on the link to access data for your region.

There can be significant differences among the metropolitan areas. For example, the CPI-U data for the Portland, Oregon, metropolitan area was last reported on August 14, 2009. The BLS reported, "The Portland area’s Consumer Price Index for All Urban Consumers (CPI-U) advanced to 214.102 (1982-84=100) during the first half of 2009 (as of June)." At the time, the nationally reported CPI-U for June 2009 was 215.693. 

Prices in the Portland area were slightly lower than the national city average. The CPI-U in the New York City area in June 2009 was 237.172. New Yorkers paid higher prices than residents of Portland and the national average price for the market basket of goods and services.

October 2009 CPI-U in Selected Major U.S. Cities

Atlanta

201.069

Chicago

211.708

Dallas

201.802

New York

237.172

San Fancisco

226.051

Seattle

226.277


[NOTE: When comparing cities, be sure to identify the correct base year period. For example, the October 2009 CPI-U for the Washington-Baltimore area was reported as 140.945. This is because the base year for that metropolitan area's CPI-U is 1996. Remember, the base period for the CPI-U for all cities is 1982-84.]

Create a "Do It Yourself" Price Index for Yourself

You can create your own price index - reflecting how you spend your money. 

 Click on the links the links (underlined questions) above to read the BLS comments on the misconceptions and questions about the consumer price index.

CONCLUSION

The November 18 BLS announcement of the CPI-U for the month of October read, "On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.3 percent in October, the U.S. Bureau of Labor Statistics reported today. The index has decreased 0.2 percent over the last 12 months on a not seasonally adjusted basis."  

"The seasonally adjusted all items increase largely reflected advances in the indexes for energy and for new and used motor vehicles. The energy index rose for the fifth time in the last six months, advancing 1.5 percent as the indexes for gasoline, fuel oil, natural gas, and electricity all increased."

Consumer prices have been relatively stable over the past several month after  series of price level decreases on late 2008. At that time, many economists and planners feared the effects of deflation - a falling price level. Small price level increases in 2009 have allayed any fears of deflation and have provided some hope that increased demand for resources and products is a sign of recovery. The Federal Reserve has stated very clearly that there is no threat of inflation that will he Fed's low interest rate policy.

Last note - Keep an eye on energy prices that have proven to be much more volatile than other prices. Economic recovery may put pressure on energy prices and the overall price level.

ASSESSMENT ACTIVITY


Essay Question:

1. Which do you think is a more meaningful measurement of consumer prices over time - the CPU-U for all items or the "core rate" (minus energy and food)?
 

EXTENSION ACTIVITY

The BLS measures the change in the price level for each goods and/or services expenditure group.  Below is an example about Measuring Price Change for Medical Care in the CPI .

Measuring Price Change for Medical Care in the CPI

"Medical care is one of eight major groups in the Consumer Price Index (CPI). There are two medical care groups, medical care commodities (MCC) and medical care services (MCS), each containing several item categories (strata). This fact sheet focuses on the four medical care categories—prescription drugs, professional services, hospital services and health insurance—that generate the most questions and concerns.

MCS, the larger component of medical care in sample size and expenditure levels, is organized into three expenditure categories (EC):

  • professional services;
  • hospital and related services; and
  • health insurance.

MCC, the other major component of medical care, includes:

  • prescription drugs; and
  • nonprescription drugs and medical supplies."

Go to the BLS CPI Home Page that lists the major expenditure groups.  Scroll down to the section titled, "How BLS Measures Price Change in the Consumer Price Index for:"  You will find the links for each expenditure group below.

Pick an expenditure group.  How is the group's price level measured.  How does it compare to other groups?

[Note to teachers:  Individual students or small groups can be assigned a specific expenditure group(s) to study.  Students can summarize the process used for the expenditure group, noting any interesting and/or unusual factors.]