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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 February 17, 2011, BLS press release of data on the consumer price index and rate of inflation for the month of January, 2011.

TASK

  • 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.

PROCESS

Global Food Prices on the Rise

The popular revolt in Egypt that ended the 30 year-long regime of President Hosni Mubarak was partially fuelled by rising food prices and potential food shortages. Egypt, where 20 percent of the population lives on less than $1 a day,  is the world’s biggest importer of wheat and the government provides subsidized bread for 14.2 million people.  Although bread is provided to so many, Egyptian food prices have continuously increased in recent years, as inflation erodes the purchasing power of the Egyptian pound. 

[NOTE:  As of February 17, 2011, one U.S. dollar was worth 5.877 Egyptian pounds.]

The problem of increasing food prices is not just an Egyptian or North African problem.  The United Nations reports that world food prices have surpassed their their highs of three years ago.  This has contributed to the wave of political unrest throughout the North African region, in response to inflation.

The Food and Agriculture Organization of the United Nations (FAO) is an international organization with 191 member nations dedicated to making sure all people have “regular access to enough high-quality food to lead active, healthy lives.” The FAO's mandate is to “raise levels of nutrition, improve agricultural productivity, better the lives of rural populations and contribute to the growth of the world economy.”

The FAO's Food Price Index is a measure of the monthly change in international prices of a market basket of food commodities. In January, 2011, the FAO Food Price Index rose for the seventh consecutive month, up 3.4 percent from December 2010, and is now at it’s the highest (in both real and nominal terms) since 1990. Prices of all the commodity groups, except meat, increased in January, 2011.

Some fear that continued world population growth, global economic recovery, and rising national debts will create even more global inflation, especially in food and other commodities.

What about inflation in the United States? Does the global trend include us?  Take a look at the most recent U.S. consumer price level and inflation data, and decide for yourself.

U.S. Bureau of Labor Statistics: Consumer Price Index - January 2011

Released February 17, 2011

"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment."

The Impact of Food and Energy Prices

"Increases in indexes for energy commodities and for food accounted for over two thirds of the all items increase. The indexes for gasoline and fuel oil both increased in January, continuing their recent strong upward trend. The index for food at home posted its largest increase in over two years with all six major grocery store food group indexes rising."

"Over the last 12 months, the food index has risen 1.8 percent, with the food at home index up 2.1 percent; both 12-month changes are the highest since 2009."

"The energy index has increased 7.3 percent over the last 12 months, with the gasoline index up 13.4 percent."

Students: Have you noticed any recent changes in the prices you pay for the goods and services you purchase?

The Core Index

"The index for all items less food and energy ( the "core" index) also rose in January. The indexes for apparel, shelter, airline fares, and recreation all posted increases. In contrast, the indexes for new vehicles and for used cars and trucks declined in January.

Take a look at the prices level changes in January for the major spending categories.  Figure 1, below, shows the "Percent Change in the CPI, All Urban Consumers, U.S. City Average, January, 2011."  Note the spending categories that increased and decreased in January.

Figure 1:  Changes in CPI All Urban Consumers
U.S. City Average
January 2010
(Seasonally adjusted)

  January
2010
12 months
Jan. - Jan.
All Items 0.4 1.6
     Food 0.5 1.8
     Food at home 0.7 2.1
     Food away from home 0.2 1.5
     Energy 2.1 7.3
     Energy commodities 4.0 13.4
     Gasoline 3.5 13.4
     Fuel oil 6.8 17.3
     Energy services -0.6 -0.7
     Electricity -0.5 1.2
All items less food and energy 0.2 1.0
     New vehicles -0.1 0.1
     Used cars and trucks -0.3 2.4
     Apparel 1.0 0
     Shelter 0.1 0.6
     Transportation services 0.6 3.4
     Medical care services -0.1 3.0

To read the full BLS report on the CPI for January, 2011, go to: www.bls.gov/news.release/cpi.nr0.htm  

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

The all urban consumer group represents about 87 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. The CPI for All Urban Consumers (CPI-U) is the index most often reported by the national media.

The level of the Consumer Price Index for All Urban Consumers (CPI-U) increased 1.6 percent over the last 12 months to an index level of 220.223 (1982-84=100), not seasonally adjusted. For the month, the index increased 0.5 percent prior to seasonal adjustment.

The market basket of goods and services that cost an urban consumer $216.87 in January of 2010, cost $220.23 in January, 2011. Is a rise of $3.36 in a month significant to you?  Remember, this index data is based on a base period of 1982-84.  That same market basket cost just $100 in 1982-84.  Take a look at the history of the level of the CPI-U at this BLS webpage: http://data.bls.gov/cgi-bin/surveymost

Students: What was the CPI-U in the month you were born?  To find out, go to: http://data.bls.gov/pdq/SurveyOutputServlet and check the year you were born in the dropdown box.

Figure 2, below, shows the history of monthly changes in the CPI-U from 2002 through January 2011. 

Figure 2 Inflation


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

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

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

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

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

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

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

The CPI, Inflation and the Cost of Living

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

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

"The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, and not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living.

Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework."

Should we worry about inflation?

On February 16, the minutes of the most recent Federal Reserve Federal Open Market Committee (FOMC) meeting were released.  The minutes provide the details the discussion at the meeting that led to the FOMC’s monetary policy.  In this case, the FOMC responded to concerns about the prospects for both inflation and deflation. 

The FOMC forecast more robust economic growth, 3.4 to 3.9 percent in 2011, and little risk of inflation.  The FOMC recognized stronger inflation in emerging markets, but did not signal any alarm for inflation in the United States.  Fed chairman Ben Bernanke reaffirmed the Federal Reserve's willingness to raise interest rates if inflation risk increases.

At the same time, the FOMC dismissed concerns about deflation, given their estimates of stronger growth.

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

"The 'core' CPI measurement represents changes in the consumer price index minus items which typically fluctuate widely from month to month - food and energy.  From the February 17 BLS announcement: "  The index for all items less food and energy rose 0.2 percent in January after increasing 0.1 percent in each of the previous two months."  Increases in the costs of shelter, apparel, airline fares, medical care, recreation and household furnishings contributed to the overall increase.  The indexes for new and used vehicles decreased in January.

Extra attention is given by forecasters to the core index as it tends to show more lasting trends in prices. The rates of change in the core index were higher in the early part of the year and that did cause concern about the trend in inflation. The concern was that the increase in energy prices over the last several years may have started to influence rates of increases in all other prices. While that concern still exists, core prices are increasing at relatively slower rates.

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

Students: Which measurement of consumer prices is more meaningful to you?  The headline rate or the core rate?

Calculating the Rate of Inflation Over a Period of Time

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

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

Looking Back in CPI History

win image

In 1973 and 1974, the United States was experiencing inflation averaging about one percent per month. U.S. consumers lost over 10 percent of their purchasing power in just one year. On October 8, 1974, President Gerald R. Ford, in a speech to Congress, announced the “Whip Inflation Now” program.

President Ford proposed a variety of grass-roots strategies to reduce the impact of inflation. He encouraged people to increase their savings and reduce spending, along public measures, such as higher taxes and reduced government spending. He encouraged  people to join the effort by wearing "WIN" buttons. Though the rate of inflation slowed somewhat for a couple of years, it reached even higher levels in 1979 and 1980.

CONCLUSION

To review, the BLS reported that the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January, and that CPI-U increased 1.6 percent over the last year.  There are fewer concerns about serious inflation in the near term.

Do we need a little inflation?

Some economists and policy makers suggest that some inflation, fueled by either strong consumer demand (demand pull) or increased demand for productive resources (cost push), is a positive sign of growth of the economy.  Deflation, on the other hand, may dampen the economy and result in a downward spiral.

The good news is that prices are stable and consumers are not struggling to pay higher prices. 

The bad news is that prices are stable (if not decreasing) and and the economy is not strong enough to create the number of jobs needed to reduce the persistently high unemployment rate.

ASSESSMENT ACTIVITY

Next, answer the question on the below interactive notepad.


1. How does inflation impact your life?

EXTENSION ACTIVITY

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

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

Take a look at the reading. Link: www.bls.gov/cpi/cpifacct.htm .

How might the prospect of inflation impact your post-high school plans - working or more education?