This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported May 19, 2010, by the U.S. Bureau of Labor Statistics (BLS) for the month of April, 2010. Students read data from the BLS report, analyze the meaning of the CPI data, determine the change in consumer prices, and explore the impact of the change in the price level on themselves, their families, consumers, and producers.
- Identify the current rate and recent changes in the consumer price index.
- Identify the factors that have influenced recent changes in the rate of inflation.
- Identify the potential policy implications of the current economic conditions, including deflation.
- Describe how inflation and deflation impact individuals, families, and different groups in the economy.
Current Key Economic Indicatorsas of November 10, 2014
The Consumer Price Index for All Urban Consumers increased 0.1 percent in October on a seasonally adjusted basis. The core inflation rate increased the same amount. For the previous 12 months, the index increased 1.7%, the same rate as reported in the September report.
According to the October report of the Bureau of Labor Statistics, the unemployment rate fell from 5.9% to 5.8%, and the number of individuals unemployed also decreased. Total nonfarm employment rose by 214,000 in October. Employment gains were concentrated in retail trade, food services and health care.
The advance estimate for real GDP growth in the third quarter of 2014 was 3.5%, a decrease from the revised second quarter growth of 4.6%. Inventory investment reduced third quarter growth, while it added to second quarter growth. In addition, consumer spending increased at a lower rate in the third quarter, compared to the second. Finally, business investment increased in the third quarter, but at a lower rate than in the second quarter.
The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.
Each month, the U.S. Bureau of Labor Statistics (BLS) releases an estimate of the 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 19, 2010, BLS press release of data on the consumer price index for the month of April, 2010.
[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, 2010), 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: End of year price level summary and potential issues. THIS LESSON]
Current Key Economic Indicators, as of May 19, 2010
On a seasonally adjusted basis, the U.S. Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.2 percent before seasonal adjustment.(May 19, 2010)
- Employment and Unemployment
U.S. non-farm payroll employment rose by 290,000 in April, the unemployment rate edged up to 9.9 percent, and the labor force increased sharply. Job gains occurred in manufacturing, professional and business services, health care, and leisure and hospitality. Federal government employment also rose, reflecting continued hiring of temporary workers for Census 2010. (May 7, 2010)
- Real GDP
U.S. real gross domestic product increased at an annual rate of 3.2 percent in the first quarter of 2010, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 5.6 percent. (April 30, 2010)
- Federal Reserve
The FOMC maintained the target for the federal funds rate at 0 to 1/4 percent, the target rate initially established in December, 2008. (April 28, 2010)
BLS Release of CPI Data for April 2010: This is the BLS CPI release from May 19, 2010.
BLS "Focus on Spending and Prices": These quarterly reports highlight recent trends in inflation and spending in the U.S. economy.
"The Consumer Price Index.": This article is from the BLS Handbook of Methods, Chapter 17. It talks in great depth about the CPI.
Frequently Asked Questions About the CPI: This site answers FAQ's for those trying to read CPI releases.
CPI Inflation Calculator: This calculator allows users to compare price changes over time due to inflation.
The Economy at a Glance: This BLS page provides current U.S. Economic Indicators.
BLS News Service Subscription Page: The reader can subscribe to receive monthly BLS email news releases.
EconomicIndicators.gov: This site provides the latest updates on U.S. economic indicators.
BLS Economic Indicators: This site provides the latest updates on U.S. economic indicators.
BEA Economic Indicators: This site provides the latest updates on U.S. economic indicators.
Whose Buying Habits Does the CPI Reflect?: This page explains that the BLS measurement of the CPI-U includes all urban consumers, representing about 87 percent of the total U.S. population.
Consumer Price Index for all Urban Consumers: U.S. City Average, by Expenditure Category and Commodity and Service Group: This table explains the current level of the CPI-U.
Assessment Activity: This interactive quiz tests students' understanding of the CPI lesson.
Producer Price Index: The PPI measures the average change over time in the selling prices received by domestic producers for their output.
College Enrollment and Work Activity of 2009 High School Graduates: This BLS article summarizes the employment data for recent high school graduates.
Key Economic Indicatorsas of May 19, 2010
On a seasonally adjusted basis, the U.S. Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.2 percent before seasonal adjustment.
U.S. non-farm payroll employment rose by 290,000 in April, the unemployment rate edged up to 9.9 percent, and the labor force increased sharply. Job gains occurred in manufacturing, professional and business services, health care, and leisure and hospitality. Federal government employment also rose, reflecting continued hiring of temporary workers for Census 2010.
U.S. real gross domestic product increased at an annual rate of 3.2 percent in the first quarter of 2010, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 5.6 percent.
The FOMC maintained the target for the federal funds rate at 0 to 1/4 percent, the target rate initially established in December, 2008.
Consumer Price Index: April 2010
U.S. Bureau of Labor Statistics
Released: May 19, 2010
U.S. consumer prices held steady in April, 2010, with a slight decline (-0.1 percent) in the CPI-U and no change in the so-called “core” price index. Inflation, as measured by the CPI-U, over the past twelve months has been just 2.2 percent. The BLS reported, “On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 2.2 percent before seasonal adjustment.
Reminder: The CPI-U, reported by the BLS, includes all categories of consumer prices and the “core” index is all price categories, excluding 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)."
Is this a positive sign of stability in the U.S. economy? Or, is it a negative sign that consumer demand and growth are not adequate enough to put pressure on prices to rise? Take a look at the BLS report to learn more.
One important factor in the report for April was a decline in energy prices. The BLS reported, “The index for energy decreased 1.4 percent in April and accounted for the seasonally adjusted decline in the all items index. The indexes for gasoline and natural gas both decreased significantly, outweighing increases in the indexes for fuel oil and electricity.” Energy, again, was the “wild card”’ in the overall price level assessment.
Food prices increased slightly in April, but not enough to offset the energy prices declines. “The food index increased 0.2 percent in April, while the index for all items less food and energy was unchanged. The index for meats, poultry, fish, and eggs rose sharply in April and accounted for the food increase; other grocery store food groups were mixed and the index for food away from home rose slightly.”
Remember, food and energy are excluded from the "core" rate of inflation because they tend to be more volatile over the short term, typically moving up and down around a more stable trend line over a longer period of time. One debate among economists and researchers is whether the overall CPI-U or the core rate is the most reliable and meaningful measure of inflation. To people who consume food and use energy daily, energy and food prices are a critical part of the cost of their budget. To others, the volatility of food and energy prices makes them an unreliable indicators of future costs.
Other highlights of the May 19 CPI announcement included:
- Indexes for recreation, airline fares, and medical care rose in April.
- Indexes for apparel and for household furnishings and operations declined in April.
- The index for energy decreased in April, but increased 18.5 percent over the past year.
- The index for all items less food and energy increased just 0.9 percent over the last 12 months. This was the smallest year-over-year increase since January 1966.
Figure 1, below, shows the monthly changes in the CPI-U for the major expenditure categories from March to April 2010 and the one-year change from April 2009 to April 2010. Note the large increases in energy prices over the past year. Look at another interesting category, used cars and trucks.” Why did they increase so much in price over the past year? The BLS did not comment on this anomaly from the trend.
|Figure 1: Percent Changes in CPI for All Urban Consumers (CPI-U):
U.S. CIty Average
April 2009-April 2010
|CPI-U All Items||-.1||2.2|
|Food at home||.2||.0|
|Food away from home||.1||1.1|
|Gasoline (all types)||-2.4||38.3|
|Utility (piped) gas service||-4.4||-2.9|
|All items less food and energy||.0||.9|
|Commodities less food and energy commodities||-.3||1.2|
|Used cars and trucks||.2||16.6|
|Medical care commodities*||.2||3.5|
|Services less services||.2||.8|
|Medical care services||.3||3.7|
|*Not seasonally adjusted|
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 non-metropolitan 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?
[Teacher Note: 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.]
With a few exceptions, these price indexes are seasonally adjusted. 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."
Calculating the CPI-U
The May 19 BLS announcement included BLS comments about how the CPI-U is calculated:
"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. All taxes directly associated with the purchase and use of items are included in the index."
"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 reas. Prices of most goods and services are obtained by personal visits or telephone calls of the Bureau's trained representatives."
"In calculating the index, 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."
"For the CPI-U and CPI-W separate indexes are also published by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for 27 local areas. Area indexes do not measure differences in the level of prices among cities; they only measure the average change in prices for each area since the base period. For the C-CPI-U data are issued only at the national level. It is important to note that the CPI-U and CPI-W are considered final when released, but the C-CPI-U is issued in preliminary form and subject to two annual revisions."
"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."
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 is 218.009. That means that the market basket of goods and services that cost $100 in 1982-84 now costs slightly over $218. The basket cost $217.63 in March, 2009 and increased by 63 cents in the last month. The cost of the market basket increased $4.74 between April, 2009, and April, 2010.
Figure 2, below, shows the major spending categories of the CPI-U in April, 2010. 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 42 percent of the total basket value. Source:Consumer Price Index for all Urban Consumers: U.S. City Average, by Expenditure Category and Commodity and Service Group
|Figure 2: Consumer Price Index (CPI-U)
Weights and Index Levels by Category
|Spending Category||Weight*||Index Level|
|Food and beverage||14.8%||219.563|
|Other (tabacco, personal care, etc.||3.5%||378.911|
|*Weights established as of December 2009|
[Teacher Note: Students may be interested in determining their own "weighted index." What percent of their monthly expenses go to different spending categories? Are their "weights" similar to the BLS CPI-U market basket weights?]
What if the base year was still 1967? The not seasonally adjusted CPI-U is currently 218.998. Prior to the BLS revision that established the current base year of 1982-84, the CPI-U base year was 1967. If 1967 was still the base year, the CPI-U would be 653.059. That is, the market basket that cost $100 in 1967 would cost a consumer just over $653 today.
The chart in Figure 3 shows the monthly changes in the CPI-U from January 2002 through April 2010. Notice the irregular upward and downward spikes in CPI changes. In the period of 2002 to mid-2005, consumer prices were relatively stable compared to 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.
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 $2,202.11in April 2010. A good that cost $100 in 1913 (all other things being equal) would cost $2,202.11 today. If electronics prices had been consistent with the CPI-U over time an I-Pod that cost $200 today would have cost just $59.95 in 1990 (if you could have bought an I-Pod in 1990).
Try the CPI 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."
Notice in Figure 4, below, the monthly changes in the CPI-U (seasonally adjusted) from January 2009 to April 2010. Inflation was moderate, but varied somewhat from month to month throughout the early half of this period. The growth of the CPI-U was very consistent, 0.2 percent each month, from September 2009 to January 2010. The biggest monthly increase was in June, 2009. The gasoline index, which rose 17.3 percent in June, accounted for over 80 percent of the increase in the all items index that month. Again, pay attention to the impact of energy prices month-to-month.
|Figure 4: One Month Changes in CPI-U
January 2009 - April 2010
(Not seasonally adjusted)
|Month||Change in CPI-U|
|February 2010||No Change|
April 2009 to April 2010:
When the rate of inflation can be predicte or is consistent over time, planners can better predict future prices and make more informed investments. Higher (or lower) costs can be factored into investment and consumption decisions.
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.
At this time, it looks like the economy is beginning to turn-around. With little threat of inflation, planning is easier and private investments can be made with a little more certainty.
- 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]
Fears of deflation have mostly ended, for now. Very low to moderate inflation has influenced the Federal Reserve to enact stimulatory monetary policies (historically low federal funds rates) without fear of rising prices. Perhaps, this is a important part of the economic stability we seek as we act to end the recession.
- What do you think will happen over the rest of 2010?
- Higher or lower prices?
- A double-dip or recovery?
- More or less unemployment?
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 18, 2010 BLS announcement of the PPI for the month of April 2010 reported, "The Producer Price Index for Finished Goods declined 0.1 percent in April, seasonally adjusted. This decrease followed a 0.7-percent advance in March and a 0.6-percent decrease in February. Prices for finished goods less foods and energy rose 0.2 percent."
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?
In April, 2010, the BlS released a report on "College Enrollment and Work Activity of 2009 High School Graduates " Take a look at this interesting data. Remember, those who graduated in 2009 left school in the heart of the recession. Will 2010 graduates have more opportunities?
"In October 2009, 70.1 percent of 2009 high school graduates were enrolled in colleges or universities, a historical high. Recent high school graduates not enrolled in college in October 2009 were more likely than enrolled graduates to be in the labor force (70.0 compared with 42.1 percent)."