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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported November 17, 2010, by the U.S. Bureau of Labor Statistics (BLS) for the month of October, 2010. Students will 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), Deflation, Inflation, Inflation Risk, Macroeconomic Indicators, Price Level, Price Stability, Real vs. Nominal

STUDENTS WILL

  • Identify the rate and change in the consumer price index and rate of inflation in the United States in October, 2010.
  • Identify factors that have influenced recent changes in the price level.
  • Describe how inflation impacts different groups in the economy.
  • Distinguish between the CPI-U, core rate and other measures of inflation.

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 November 17, 2010, BLS press release of data on the consumer price index for the month of October, 2010.

For the latest updates on U.S. economic indicators, go to:

[NOTE: You can subscribe to receive monthly BLS email news releases. To subscribe, go to the BLS News Service Subscription Page. www.bls.gov/bls/list.htm   ]

[Note on the CPI and Inflation "Focus on Economic Data" LessonsDuring the first semester of this school year (September-December, 2010), EconEdLink will publish four lessons on "Consumer Price Index and Inflation." During this time period, the Focus on Economic Data will begin with the "basics" in September 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.
  • November: U.S. regional and global price level and inflation comparisons, with links to CPI data by region.  THIS LESSON
  • December: The relationships of CPI and inflation data to other economic data, such as GDP, employment. etc. and the business cycle. End of year price level summary and potential issues.]

RESOURCES

  • BLS "Focus on Spending and Prices":  These quarterly reports highlight recent trends in inflation and spending in the U.S. economy.
    www.bls.gov/opub/focus/

Key Economic Indicators

as of November 17, 2010

Inflation

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in October on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment

Employment and Unemployment

U.S. Nonfarm payroll employment increased by 151,000 in October, and the unemployment rate was unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Since December 2009, nonfarm payroll employment has risen by 874,000.

Real GDP

U.S. real gross domestic product increased at an annual rate of 2.0 percent in the third quarter of 2010, according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.7 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 for the federal funds rate for an extended period.

PROCESS

The Bureau of Labor Statistics news release about the consumer price index (CPI-U) for the month of October 2010 was very much like the CPI news releases in several previous months.  The BLS reported a very moderate rise in the general price level, and then commented on the key role that energy prices played in the determination of the price index for the month of October.

U.S. Bureau of Labor Statistics News Release
Consumer Price Index - October 2010

Released November 17, 2010

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment.”

As has frequently been the case in recent months, an increase in the energy index was the major factor in the all items seasonally adjusted increase. The gasoline index rose for the fourth month in a row and accounted for almost 90 percent of the all items increase; the household energy index rose as well.”

The overall CPI-U increase was primarily due to the increase in energy prices in October.  Did you notice the jump in gasoline prices last month?  The CPI added 0.2 percent for the month, but after factoring out energy and food (the core index), there was no significant change.  The BLS commented, “The index for all items less food and energy was unchanged in October, the third month in a row with no change.”

[Teacher Note: Reinforce the difference between the "headline" number - the CPI for all items and the "core" rate, the CPI minus food and energy prices.  Which is the better meeasure of the price level over time?] 

What categories of consumer prices changed in October?

Figure 1, below, shows the price level changes for the spending categories of the CPI market basket that increased and decreased on the month of October.  Do you see any patterns? 

Figure 1:  CPI-U Price Level Changes by Spending Category
(Se
asonally adjusted)
  Sept.
2010
Oct.
2010
12 mos. ended
Oct. 2010
These spending category price levels increased in October:
All Items .1 .2 1.2
Food .3 .1 1.4
Food at home .3 .0 1.4
Food away from home (1) .3 .1 1.4
Energy .7 2.6 5.9
Energy commodities 1.8 4.4 9.9
Gasoline (all types) 1.6 4.6 9.5
Fuel oil(1) .8 4.7 14.5
Energy services -.8 .2 .9
Electricity -.3 .4 .6
All items less food and energy .0 .0 .6
Medical care commodities .3 .1 2.5
Services less energy services .1 .1 .8
Shelter .0 .1 -.3
Transportation services .3 .3 2.8
Medical care services .8 .2 3.6
These spending category price levels decreased in October: 
Utility (paid) gas service -2.3 -.4 1.9
All items less food and energy .0 .0 .6
Commodities less food/energy commodities -.2 -.2 .1
New vehicles .1 -.2 .4
Used cars and trucks -.7 -.9 8.6
Apparel -.6 -.3 -1.2
(1) = not seasonally adjusted

Some Prices Go Up

Look again at energy commodities, gasoline, and fuel oil.  If many people in your region heat their homes with fuel oil, their budgets were hit hard by this month’s price increase.  Did they think ahead and buy fuel oil in September?

Those who drive long distances commuting to work or who drove to grandma’s house for Thanksgiving dinner may have felt the October price change a little more than others. 

Some Prices Go Down

As usual, some price categories decreased.  Why do you think use car and apparel prices decreased in October?  It must have something to do with supply and demand!

How the overall price level change affects each individual is determined by their individual consumption pattern.  Remember, the CPI is a “market basket” of goods and services that reflects typical consumer purchasing.  The impact will be significant different between demographic and geographic groups.  

[Teacher Note:  A good discussion for students may be to identify their personal consumer behaviors and wants that influence how they are affected by inflation.] 

The Level of the CPI-U in October 2010

The CPI-U for October 2010 was 218.879.  That is an increase of 50.7 cents from September.   Remember, the level of the CPI-U is relative to the base year level of 100.  The base year for most of the spending categories is the period of 1982-84.  That means the market basket of goods and services cost $100 in 1983-84. 

How much inflation have we experienced since 1982-84?  The CPI-U index has increased by 118.879 points, so the price level has slightly more than doubled in that period of time, a 118% increase in 26 years.  Simply put, it has increased by an average of about 4 ½ percent per year. 

Figure 2, below, shows the monthly changes in the CPI-U from 2002 through October 2010.  Note the great variations of change over the time period.  Note the spikes of monthly changes over one percent in September, 2005 and in June, 2008.  More recently, note the three month period of 0.7 percent monthly price level decreases in 2008.  At that time, deflation, a sustained drop in the price level was a serious concern for many economist, financial analysts, and planners.

figure 2

For more detailed price index data for October, 2010, see Table 2 of the BLS news release.  Consumer Price Index Data for October 2010. www.bls.gov/news.release/cpi.t02.htm

[Teacher Note: Use the following "Bonus Activity" as a class assignment.]
 
BONUS ACTIVITY:  How much have consumer prices changed since you were born?

Use the BLS "Inflation Calculator" to determine how much the CPI has changed since the year you were born. LINK: http://data.bls.gov/cgi-bin/cpicalc.pl [5]

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.
 
Not Seasonally Adjusted CPI measures

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.2 percent over the last 12 months to an index level of 218.711 (1982-84=100). For the month, the index rose 0.1 percent prior to seasonal adjustment.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.5 percent over the last 12 months to an index level of 214.623 (1982-84=100). For the month, the index rose 0.1 percent prior to seasonal adjustment.

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 1.0 percent over the last 12 months. For the month, the index rose 0.2 percent on a not seasonally adjusted basis. Please note that the indexes for the post-2008 period are subject to revision.

BLS Note on Seasonal Adjustment

“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.” 

For more information, go to the CPI home page at www.bls.gov/cpi/ or contact the CPI Information and Analysis Section at (202) 691-7000 begin_of_the_skype_highlighting              (202) 691-7000 begin_of_the_skype_highlighting              (202) 691-7000      end_of_the_skype_highlighting begin_of_the_skype_highlighting              (202) 691-7000      end_of_the_skype_highlighting begin_of_the_skype_highlighting              (202) 691-7000      end_of_the_skype_highlighting begin_of_the_skype_highlighting              (202) 691-7000      end_of_the_skype_highlighting begin_of_the_skype_highlighting              (202) 691-7000      end_of_the_skype_highlighting begin_of_the_skype_highlighting              (202) 691-7000      end_of_the_skype_highlighting begin_of_the_skype_highlighting              (202) 691-7000      end_of_the_skype_highlighting begin_of_the_skype_highlighting              (202) 691-7000      end_of_the_skype_highlighting      end_of_the_skype_highlighting.

U.S. Regional Differences in Price Levels

The BLS also collects and reports consumer price level changes in four large regions of the United States and major metropolitan areas through its regional offices.  Price levels will vary from region to region for a variety of reasons.   The following are the BLS press releases on the regional consumer price indexes for October, 2010.

The BLS Regions

The Northeast - Connecticut, Maine, Massachusetts, New Hampshire, New York, New Jersey, Pennsylvania, Rhode Island, and Vermont.

“The Consumer Price Index for All Urban Consumers (CPI-U) in the Northeast region rose 0.3 percent in October, the U.S. Bureau of Labor Statistics reported today. Sheila Watkins, the Bureau’s regional commissioner, noted that the recent increase was largely due to a 2.2 percent advance in the energy index. Prices were also higher for both all items less food and energy (0.1 percent) and food (0.3 percent) over the month. Within the energy index, higher gasoline prices led the recent increase.”

“Over the last 12 months, the CPI-U increased 1.5 percent. The index for all items less food and energy rose 0.9 percent over the year. Prices were also higher for both energy (6.1 percent) and food (1.7 percent) since October 2009.”

The Midwest - Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.

“The Consumer Price Index for All Urban Consumers (CPI-U) in the Midwest was unchanged in October the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Charlene Peiffer noted that the indexes for food and all items less food and energy (each up 0.1 percent) registered little movement over the month and the index for energy decreased 1.8 percent. Within the index for all items less food and energy, apparel prices increased reflecting normal seasonal patterns while prices for used cars and trucks were among those that recorded declines.”

“Over the last 12 months the CPI-U rose 1.5 percent. The energy index, which includes motor fuel and household fuels, was up 8.4 percent since last October and the index for food rose 1.5 percent. Excluding food and energy, the CPI-U increased 0.6 percent over the year.”

The South - Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia.

The Consumer Price Index for All Urban Consumers (CPI-U) for the South was little changed, up 0.1 percent in October, the U.S. Bureau of Labor Statistics reported today. Sheila Watkins, the Bureau’s regional commissioner, noted that prices edged up for both energy and all items less food and energy, while food prices were unchanged. Within the all items less food and energy group, apparel and medical care were among those indexes that recorded increases.

Over the last 12 months, the CPI-U rose 1.3 percent. The index for all items less food and energy advanced 0.8 percent over the year.

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

“Prices in the West region, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), increased 0.1 percent in October, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Stanley W. Suchman noted that the special aggregate index for all items less food and energy was unchanged over the past month.”

“Over the last 12 months, the CPI-U rose 0.6 percent. Energy prices rose 4.5 percent, largely the result of an increase in the price of gasoline. The index for all items less food and energy edged up 0.1 percent since October 2009.”

Figure 3:  Regional Price Level changes
October 2010
Region CPI-U Change
Sept. 2010 to
Oct. 2010
CPI-U Change
Oct. 2009 to
Oct. 2010
Core CPI-U
Oct. 2009 to
Oct. 2010
Energy Prices
Oct. 2009 to
Oct. 2010
West +0.1% +0.6% +0.1% +4.5
South +0.1% +1.3% +0.8% +5.2%
Midwest no change +1.5% +0.6% +8.4%
Northeast +0.3% +1.5% +0.9% +6.1%

 

Notice the differences between the CPI-U increases over the last year in the four regions.  The Northeast experienced a larger increase than the other regions in October.  The West had a much smaller CPI-U increase over the last year and a smaller increase in the core rate of inflation.  The Midwest experienced a greater increase in energy prices.   All four of the regional reports mentioned the significant impact of energy prices in the past year on their overall price level.

Take a look at the price level and inflation data for your region and/or your closest large metropolitan area.  Go to the link to your region.  

All regional data links:  http://www.bls.gov/regions/cpi.asp

[Teacher Note:  Assign groups of studnets to the four regions.  They can examine their assigned region's datal and summarize it for the whole class.  They can speculate about the factors that have influenced prices in their assigned region.

The BLS also publishes data for major metropolitan areas.  If your school is in one of the metropolitan areas, you can have students read their local data. www.bls.gov/bls/regnhome.htm .]

International Price Level Comparisons

The BLS also publishes comparisons of price level data for the major industrialized nations; the United States, Canada, Japan, France, Germany, Italy, Sweden, Switzerland, and the United Kingdom.  Link: ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/flscpim.txt

Take a look at the most recent data for the nine nations.  Figue 4, below, shows the consumer price indexes in the nine countries, by percent change from same period of previous year, for the years 1995 to 2010.

Figure 4:  Consumer Price Index in 9 countries
% change from same period of previous year
1995-2010
Year United
States
Canada Japan France Germany Italy Sweden Switz-
erland
United
Kingdom
1995 2.8 2.2 -0.1 1.8 1.8 5.3 2.5 1.8 3.5
1996 3.0 1.5 0.1 2.0 1.4 4.0 0.5 0.8 2.4
1997 2.3 1.7 1.9 1.2 1.9 2.0 0.5 0.5 3.1
1998 1.6 1.0 0.6 0.7 1.0 2.0 -0.1 0.0 3.4
1999 2.2 1.8 -0.3 0.5 0.6 1.7 0.4 0.9 1.5
2000 3.4 2.7 -0.8 1.7 1.4 2.5 1.0 1.5 3.0
2001 2.8 2.5 -0.7 1.7 1.9 2.7 2.5 1.0 1.8
2002 1.6 2.2 -0.9 1.9 1.5 2.5 2.1 0.6 1.7
2003 2.3 2.8 -0.3 2.1 1.0 2.7 1.9 0.6 2.9
2004 2.7 1.8 0.0 2.1 1.7 2.2 0.4 0.8 3.0
2005 3.4 2.2 -0.3 1.8 1.5 1.9 0.4 1.1 2.8
2006 3.2 2.0 0.3 1.6 1.6 2.1 1.4 1.1 3.2
2007 2.8 2.2 0.0 1.5 2.3 1.8 2.2 0.7 4.3
2008 3.8 2.3 1.4 2.8 2.6 3.3 3.5 2.5 4.0
2009 -0.4 0.3 -1.4 0.1 0.4 0.8 -0.3 -0.5 -0.5
2010 (Q3) 1.2 1.8 -0.8 1.5 1.2 1.6 1.1 0.3 4.7
Source:  BLS, ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/flscpim.txt

 

What nations have expereinces more or less inflation than the United States? 
 
Take a look at Japan, where the price level fell (deflation) each year from 1999 to 2005, and again in 2009 and 2010.  Many refer to the Japanese economy during the late 1990s and early 2000s as the "lost decade." 
 
In a more detailed annual report, the BLS compares the consumer price indexes of 16 and 2 regions, the "International Indexes of Consumer Prices.
 
Go to this link: www.bls.gov/fls/intl_consumer_prices_annual.htm   Look at the graphs of the annual CPI changes for the nations.  Do you see any patterns?  Notice that all of the nations experienced a greater than normal increase in their CPIs in the year 2008.
 
[Teacher Note:  The Federal Reserve Bank of Cleveland provides a toolto search for price level data for many nations.  You can select countries and time periods.  Studnets can use this online tool to learn about different countries or regions.]
 
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, www.bls.gov/cpi/
 
Calculating the Price 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.”  Note: This example uses seasonally adjusted CPI data.
 
Index Point Change
 
Consumer Price Index (Nov. 2010)               218.771
Less previous CPI (Nov. 2009)                      218.177
Equals index point change                             0.594
 
Percent Change
 
Index point difference                                      0.594
Divided by the previous index                        218.177
Equals                                                                0.0027
Results multiplied by one hundred              0.0027x100
Equals percent change (annual)                  0.27%
 
[Teacher Note: given the levels of CPI data from one period to another, nationally, by regio or local area, students should be able to use this formula to determine the rate of inflation.]

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. 

ASSESSMENT ACTIVITY

Have your students use this activity to complete a multiple choice assessment of the November 17, 2010, BLS "Consumer Price Index" announcement.  

1. According to the November 17, 2010, BLS press release, how much did the CPI-U (seasonally adjusted) increase in October 2010? 

a. 0.0 percent
b. 0.2 percent [CORRECT]
c. 1.2 percent 

[See the BLS announcement. "The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment.”]

2. What was the level of the CPI-U in October 2010 (not seasonally adjusted)? 

a. 218.779 [CORRECT]
b. 221.193
c. 228.871 

[See the lesson "Process" section: "The CPI-U for October 2010 was 218.879.  That is an increase of 50.7 cents from September.”]

3.  The BLS announcement included this phrase:  "The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.2 percent over the last 12 months to an index level of 218.711 (1982-84=100)."   What does the reference to (1982-84 =100) mean?

a.  The CPI was first measured in 1982-84.
b.  1982-84 is the base year of the CPI-U. [CORRECT]
c.  Subtract 100 to get the 1982-84 CPI average. 

[The reference to "1982-84" identifies the base year period of the current CPI-U data.  In 1982-84 period, the CPI-U was 100. The average of the 1982-84 price level was used to create the base of 100.]  

4.  Which of these spending categories saw a decrease in its price level in October 2009?

a.  food
b.  apparel [CORRECT]
c.  shelter

[See the lesson, Figure 1.  Apparrel decreased 0.6 percent in October.  Food increased 0.3 percent in October.  Housing did not change in October.]

5.  Which nation experienced a long period of deflation in the early 2000's?

a.   Japan [CORRECT]

b.   Sweden

c.   United States

[See the lesson Figure 4.  The price level in japan decreased each year from 1999 to 2005. ]   

6.  How often are the CPI-U data for the four regions reported by the BLS?

a.  monthly  [CORRECT]
b.  semi-monthly
c.  semi-annually

[See the lesson "process' section and regional links.  Data for the four regions are reported monthly.]

7.  Which of these U.S. regions experienced the greatest increase in the CPI in October, 2010?

a.  West
b.  Northeast [CORRECT]
c.  South

[See lesson Figure 3:  West, + 0.1 percent; South, + 0.1 percent; Northeast, + 0.3 percent.] percent]

8.  Which of these is NOT a reason for seasonal adjustment of the CPI data?

a.  changing climatic conditions
b.  holidays
c.  foreign exchange rates [CORRECT]

[According to the BLS press release, "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.]

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)?
 
[Student answers will vary. 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

The consumer price index for the United States has changed very little over the past month and year.  Inflation has not been a significant factor, the exception being the somewhat erratic fluctuations of energy prices.  As the U.S. economy slowly recovers and unemployment remains stubbornly high, there are few pressures in consumer prices to rise.

When economic growth returns and jobs are created, consumer demand for goods and servces may pressure the price level to rise.  Some will see this as a good sign, as moderate inflation over time is a good sign for the economy.

Watch for possible Federal Reserve monetary policy actions to target some level of inflation.

EXTENSION ACTIVITY

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?