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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported March 18, 2010, by the U.S. Bureau of Labor Statistics for the month of February, 2010. Students will read the BLS report, read about the meaning of the CPI, determine the change in consumer prices, and explore how the change in the CPI impacts consumers and the economy.

KEY CONCEPTS

Causes of Inflation, Consumer Price Index (CPI), Inflation, Macroeconomic Indicators, 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 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

This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported March 18, 2010, by the U.S. Bureau of Labor Statistics (BLS) for the month of February, 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.

The lesson includes a look at consumer prices in major U.S. metropolitan areas and how the prices of the expenditure groups are determined.

[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 semester 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).  THIS LESSON
  • 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.]

RESOURCES


Key Economic Indicators

as of March 18, 2010

Inflation

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.1 percent before seasonal adjustment.

Employment and Unemployment

Nonfarm payroll employment was little changed (-36,000) in February, and the unemployment rate held at 9.7 percent. Employment fell in construction and information, while temporary help services added jobs. Unusually severe winter weather in parts of the country may have affected payroll employment in February; however, it is not possible to quantify precisely the net impact of the winter storms.

Real GDP

Real gross domestic product increased at an annual rate of 5.9 percent in the fourth quarter of 2009 according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 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

Consumer prices did not significantly change between January and February 2010, and the consumer price index increased by just 2.1 percent over the past year.  Given the slow recovery of this recession and stubbornly high unemployment, there seems to be little pressure on prices to rise.  Although the U.S. real GDP is growing again, high unemployment and slow credit markets continue to cause the Federal Reserve to keep interest rates low and to encourage further stimulus policies with little concern about inflation. The March 18, 2010, BLS press release on the CPI gives us the details.

Consumer Price Index Summary
U.S. Bureau of Labor Statistics Press Release March 18, 2010

“On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.1 percent before seasonal adjustment.”

The BLS went on to highlight some of the significant factors affecting the price level. As usual, energy prices were a key factor in the overall trend. This month, energy price decreases balanced out small increases in some of the other sectors. 

“The unchanged all items index was the result of a decline in the energy index being offset by slight increases in the indexes for food and for all items less food and energy. Within the latter group, declines in the indexes for apparel and household furnishings and operations were more than offset by continuing increases in the indexes for medical care and used cars and trucks. The 12-month increase in the index for all items less food and energy now stands at 1.3 percent, the lowest since February 2004.”

“The food index also edged up in February. The food at home index rose slightly, the net result of the major grocery store food group indexes posting a mix of modest increases and decreases. In contrast, the energy index declined in February. Decreases in the indexes for gasoline, electricity, and fuel oil more than offset an increase in the index for natural gas.”

Figure 1, below, shows the percentage increases of prices for the major product groups included in the consumer price index. Note the large increases in energy commodities, gasoline, and fuel oil over the twelve month period. This category continues to reflect the very high oil and gasoline prices in mid-2009.

CPI Figure 1

Highlights of the Consumer Price Index Data by Product Group, February 2010

Food “The food index rose 0.1 percent in February after increasing 0.2  percent in January. The indexes for food away from home and food at home both rose 0.1 percent. Within the latter group, the index for meats, poultry, fish, and eggs posted the largest increase among major grocery store food groups, rising 0.4 percent as the indexes for pork and for eggs both rose 2.6 percent. The index for other food at home rose 0.2 percent, and the index for cereals and bakery products was unchanged. The indexes for fruits and vegetables and for dairy and related products both decreased 0.1 percent in February after rising in January, and the nonalcoholic beverages index fell 0.4 percent. Over the last 12 months, the food index declined 0.2 percent, with the index for food away from home rising 1.4 percent but the food at home index falling 1.5 percent.”

Energy “After rising 2.8 percent in January, the energy index declined 0.5 percent in February, the first decrease since April 2009. The decline was the result of a decrease in the gasoline index, which fell 1.4 percent. (Before seasonal adjustment, gasoline prices fell 2.8 percent in February.) The index for household energy rose 0.4 percent in February due to an increase in the index for natural gas, which rose 3.9 percent in February after increasing 3.5 percent in January. This more than offset declines in the fuel oil index, which fell 2.4 percent, and the electricity index, which fell 0.5 percent, its third consecutive decrease. Over the last 12 months the energy index has risen 14.4 percent with the gasoline index up 36.8 percent but the index for household energy down 3.0 percent.”

All items less food and energy   “The index for all items less food and energy, which declined 0.1 percent in January, increased 0.1 percent in February. The medical care index rose in February, increasing 0.5 percent for the second straight month. The index for medical care services increased 0.4 percent and the medical care commodities index rose 0.8 percent with the prescription drug index up 0.6 percent. The index for used cars and trucks continued to rise, increasing 0.7 percent in February, while the index for new vehicles rose 0.1 percent. The shelter index, which declined in January, was unchanged in February, as both rent and owners' equivalent rent were unchanged. The apparel index decreased 0.7 percent, as did the index for airline fares. The index for household furnishings and operations declined 0.4 percent, and the index for recreation fell 0.1 percent.”

[Note to teacher: Again, which is the most important measurement of the price level - with or without energy and food?  Ask you students.]

Not seasonally adjusted CPI measures

“The Consumer Price Index for All Urban Consumers (CPI-U) increased 2.1 percent over the last 12 months to an index level of 216.741 (1982-84=100). For the month, the index was unchanged prior to seasonal adjustment.”

“The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.8 percent over the last 12 months to an index level of 212.544 (1982-84=100). For the month, the index was unchanged prior to seasonal adjustment.”

“The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 2.2 percent over the last 12 months. For the month, the index was unchanged on a not seasonally adjusted basis. Please note that the indexes for the post-2008 period are subject to revision.”

Why make seasonal adjustments?

From the BLS press release, "Because price data are used for different purposes by different groups, the Bureau of Labor Statistics publishes seasonally adjusted as well as unadjusted changes each month.

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.

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."

A Brief Review of the Consumer Price Index (from the BLS Press release)

“The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The Bureau of Labor Statistics publishes CPIs for two population groups: (1) the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 32 percent of the total population and (2) the CPI for All Urban Consumers (CPI-U) and the Chained CPI for All Urban Consumers (C-CPI-U), which cover approximately 87 percent of the total population…”

“The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 25,000 retail establishments-department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments….Prices of fuels and a few other items are obtained every month in all 87 locations. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other areas.”    

“…price changes for the various items in each location are averaged together with weights, which represent their importance in the spending of the appropriate population group. Local data are then combined to obtain a U.S. city average.”  

“The index measures price change from a designed reference date. For the CPI-U and the CPI-W the reference base is 1982-84 equals 100.0. The reference base for the C-CPI-U is December 1999 equals 100. An increase of 16.5 percent from the reference base, for example, is shown as 116.5. This change can also be expressed in dollars as follows: the price of a base period market basket of goods and services in the CPI has risen from $10 in 1982-84 to $11.65.”  

For more details about the CPI, go to the BLS web page, Consumer Price Indexes .

Calculating the Index Changes

“Movements of the indexes from one month to another are usually expressed as percent changes rather than changes in index points, because index point changes are affected by the level of the index in relation to its base period while percent changes are not. The example below illustrates the computation of index point and percent changes.”   

“Percent changes for 3-month and 6-month periods are expressed as annual rates and are computed according to the standard formula for compound growth rates. These data indicate what the percent change would be if the current rate were maintained for a 12-month period.”

Index Point Change
Consumer Price Index (Feb. 2010) 216.741
Less previous index (Feb. 2009)  212.193
Equals index point change  4.548
Percent Change
Index point difference      4.548
Divided by the previous index   212.193
Equals 0.021
Results multiplied by one hundred 0.021 x 100
Equals percent change (annual) 2.1%

Figure 2, below, shows the monthly changes in the CPI from 2002 to the present. Note the recent period of price level decreases in late 2008. At that time, some economists were concerned about the possibility of “deflation” and its potential harm.

CPI Figure 2

BLS Regional CPI Data

Data for the U.S. geographic regions and metropolitan areas is reported monthly, bi-monthly or semi-annually.  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.

West: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.

Consumer Price Index News Releases Issued by BLS Regional Information Offices
Click here to access data for your region.

Data for many major cities (metropolitan areas) are reported regularly by the BLS. Data for the largest U.S. cities - New York, Chicago, Los Angeles, Washington-Baltimore, and Philadelphia - are reported monthly. Other major city metropolitan areas are reported bi-monthly or semi-annually. 

There can be significant differences in price level and changes among the metropolitan areas. For example, the CPI-U data for the Minneapolis-St. Paul (Minnesota, Wisconsin) metropolitan area was last reported on February 19, 2010. The BLS reported, "The second half 2009 Minneapolis-St. Paul all items Consumer Price Index for All Urban Consumers (CPI‑U) was 209.611 (1982-84=100). This second half gain was greater than the 0.6 percent increase recorded in the second half of 2008.” “On an annual average basis, Minneapolis-St. Paul area consumers paid 0.5 percent less for goods and services in 2009 than in 2008. Declines in the energy related categories of gasoline and utility (piped) gas service were key contributing factors to the annual decline…”

CPI data can vary significantly by city, reflecting local prices. At the end of 2009, the CPI-U for New York-Northern N.J.-Long Island (NY-NJ-CT-PA) was 238.427. In February, the CPI-U for Minneapolis-St. Paul was 209.611. A market basket of goods and services that cost about $219 in Minneapolis cost over $238 in New York.

January 2010 CPI-U in Selected Major U.S. Cities

Minneapolis

209.611

Chicago

212.456

Dallas

202.106

New York

238.862

San Francisco

226.145

Seattle

226.085

Boston

237.266


[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. The base period for the CPI-U for all cities is 1982-84.]

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

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.


Some Consumer Price Index FAQs. 

Click on the links (underlined questions) for the 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?  

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)? [The argument for the "core rate" of inflation is that energy and food prices have historically been much more volatile and have tended to rise and fall above the CPI-U without energy and food included. Other students may argue that energy and food prices are a real part of the consumers' market basket and should be included. Students may reason that including energy and food when looking at month-to-month or short-time changes is more realistic, and that the core rate is a better comparison of price levels over a long time period.]

CONCLUSION

Consumer prices did not significantly change in February 2010, and the CPI increased by just 2.1 percent in the past year.  Energy prices moved in the opposite direction from other spending categories to result in no real change.  There was nothing significant in the BLS press release to indicate any trend.

How you have been impacted by inflation is largely determined by your personal spending habits.

You Can Design Your Own Personal CPI

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

4. 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.)
5. Make the current price of the basket the "base" by designating it as 100.
6. 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.
7. 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%.
8. 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).
9. 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 "market basket" in the past year? 
  • What do you think will happen to those prices in the coming year?       
  • Does taking the food and energy items out of your basket make a difference?

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 Consumer Price Index web 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.]