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This lesson focuses on the Consumer Price Index (CPI) and rate of inflation reported March 17, 2011, by the U.S. Bureau of Labor Statistics (BLS) for the month of February, 2011. 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

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 February, 2011.
  • 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 March 17, 2011, BLS press release of data on the consumer price index for the month of February, 2011.

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 second semester of this school year (January-May, 2011), 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 September 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: U.S. regional and global price level and inflation comparisons, with links to CPI data by region.  THIS LESSON
  • 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.]

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/
  • "The Consumer Price Index.": This article is from the  BLS Handbook of Methods, Chapter 17.  It talks in great depth about the CPI.
    www.bls.gov/opub/hom/pdf/homch17.pdf
     
  • Frequently Asked Questions About the CPI:  This site answers FAQ's for those trying to read CPI releases.
    www.bls.gov/cpi/cpifaq.htm
     
  • CPI Inflation Calculator:  This calculator allows users to compare price changes over time due to inflation.
    http://data.bls.gov/cgi-bin/cpicalc.pl
     
  • EconomicIndicators.gov:  This site provides the latest updates on U.S. economic indicators.
    www.economicindicators.gov/
     
  • BLS Economic Indicators:  This site provides the latest updates on U.S. economic indicators.
    www.bls.gov/bls/newsrels.htm#major/
     
  • 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.
    www.bls.gov/cpi/cpifaq.htm#Question_3
     
  • 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.
    www.bls.gov/news.release/cpi.t01.htm
     
  • BLS Feature: Focus on Prices and Spending ; What Does the Producer Price Index Measure? The BLS breaks down the official definition of the Producer Price Index to clear up common misconceptions about prices, production, and price pass-though within the PPI.
    www.bls.gov/opub/focus/volume1_number9/ppi_1_9.htm

Key Economic Indicators

as of March 17, 2011

Inflation

On a seasonally adjusted basis, the CPI-U increased 0.5 percent in February after rising 0.4 percent in January. The index for all items less food and energy rose 0.2 percent in February, the same increase as in January.

Employment and Unemployment

U.S. non-farm payroll employment increased by 192,000 jobs in February, and the unemployment rate fell by 0.1 percent to 8.9 percent. Job gains occurred in manufacturing, construction, professional and business services, health care, and transportation and warehousing.

Real GDP

U.S. real gross domestic product increased at an annual rate of 2.8 percent in the fourth quarter of 2010, according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter of 2010, U.S. real GDP increased 2.6 percent.

Federal Reserve

The Federal Open Market Committee 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

In February, 2011, while most U.S. consumer prices remained fairly stable, some prices went up more than others and a few went down.  Energy prices led the increases - gasoline was up 4.7 percent and fuel oil was up 5.8 percent in February.  Apparel prices decreased in February.

Take a look at the latest BLS report on consume prices to better understand how these changes might affect your life.

U.S. Bureau of Labor Statistics News Release
Consumer Price Index - February, 2011
Released March 17, 2011

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in February on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.1 percent before seasonal adjustment.

The February monthly CPI-U increase was just slightly greater than the 0.4 percent increases in December, 2010, and January, 2011.  The increase over the past year was at a greater pace than that of the previous two months - an annual rate of +1.5 percent in December, 2010, and January, 2011- and significantly greater than the average annualized rate through the previous six months.

Remember, the reference to the “all items index” means the index that includes the more volatile energy and food prices.  Often, this is called the “headline” number because it is the number most often reported in the news. 

"Though the seasonally adjusted increase in the all items index was broad-based, the energy index was once again the largest contributor. The gasoline index continued to rise, and the index for household energy turned up in February with all of its components posting increases. Food indexes also continued to rise in February, with sharp increases in the indexes for fresh vegetables and meats contributing to a 0.8 percent increase in the food at home index, the largest since July 2008."

Again, energy and food prices were the primary contributors to the overall price level increase.  The "core” CPI-U, which factors out energy and food prices, showed a more modest increase of 0.2 percent in February.  Over the past year, the core index increased only 1.2 percent.

"The index for all items less food and energy rose in February as well. Most of its major components posted increases, including the indexes for shelter, new vehicles, medical care, and airline fares. The apparel index was one of the few to decline."

"The 12-month changes in major indexes continue to trend upward. The all items index increased 2.1 percent for the 12 months ending February; the figure was 1.1 percent as recently as November. The 12-month increase in the index for all items less food and energy reached 1.1 percent in February after being as low as 0.6 percent in October. The 11.0 percent increase in the energy index is the largest since May 2010, while the 2.3 percent rise in the food index is the largest since May 2009."

[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 measure of the price level over time?  Remind the students taht if they spend a lage portion of their inome on gasoline and food, the impact of the price level change may hit them harder than others.]

What categories of consumer prices changed in February and over the last year?

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

Figure 1: Percent Changes in CPI All Urban Consumers
U.S. City Average
February 2011
(Seasonally adjusted)
  February
2011
12 months
Feb.-Feb.
All Items 0.5% 2.1%
   Food 0.6% 2.3%
   Food at home 0.8% 2.8%
   Food away from home 0.2% 1.6%
   Energy 3.4% 11.8%
   Energy commodities 4.8% 19.3%
   Gasoline 4.7% 19.2%
   Fuel oil 5.8% 27.1%
   Energy services 1.1% 0.2%
   Electricity 0.4% 2.2%
All items less food and energy 0.2% 1.1%
   New vehicles 1.0% 0.9%
   Used cars and trucks 0.1% 1.9%
   Apparel -0.9% -0.4%
   Shelter 0.1% 0.8%
   Transportation services 0.5% 3.5%
   Medical care services 0.4% 3.0%


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 plan to drive to their summer vacation may feel the early 2011 gasoline price increase more than others.

Some Prices Go Down

As usual, some price categories decreased.  Why do you think apparel prices decreased?  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.

Ask: Who is affected the most by inflation?  Possible answers: Those on a fixed income who cannot increase their income, lenders who are repaid with dollars that have lost purchasing power; people who are more dependent on fuel and food in their budgets.]

The Level of the CPI-U in February 2011

The level of the CPI-U in February, 2011, was 221.309.  That is an increase of $1.09 from January.   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 121.309 points, so the price level has slightly more than doubled in that period of time, a 121% increase in 26 years.  Simply put, it has increased by an average of about 3-4 percent per year.

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

CPI Figure 2

For more detailed price index data for February, 2011, see Table 2 of the BLS news release.  Consumer Price Index - February 2011. www.bls.gov/news.release/cpi.nr0.htm

Not Seasonally Adjusted CPI measures

The annual level of the CPI-U is not affected by seasonal changes that may occur from one season to another, so it is reported as “not seasonally adjusted.”  The annual level is the index number.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 2.1 percent over the last 12 months to an index level of 221.309 (1982-84=100). For the month, the index increased 0.5 percent prior to seasonal adjustment.”

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.3 percent over the last 12 months to an index level of 217.535 (1982-84=100). For the month, the index rose 0.5 percent prior to seasonal adjustment.

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.

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.  

Figure 3, below, show some of the key regional price data.  Note some regional differences.  The general price level is much higher in the Northeast than in other regions.  Prices are generally lower in the Midwest.  Energy prices increased more in the past year in the Midwest and less in the Northeast.

Figure 3: Regional Price Level Changes
February 2011
Region CPI-U 2010
Annual
Average
CPI-U
February
2011
CPI-U Change
Feb. 2010 to
Feb. 2011
Energy Prices
Feb. 2010 to
Feb. 2011
West 221.203 224.431 +1.9% +7.2%*
South 211.338 214.735 +2.2% +11.2%
Midwest 208.046 211.090 +2.2% +11.3%
Northeast 233.241 237.110 +2.0% +9.8%
U.S. Total 218.056 221.309 +2.1% +11.0%
*West region energy price change data is January 2011 to January 2011.


The following are the most recent BLS press releases on the regional consumer price indexes for February, 2011, in the Northeast, West and South regions, and for January, 2010 for the West region.

Northeast Region

Consumer Price Index, Northeast Region – February 2011

 “Regional Prices 0.5 Percent Higher Over the Month; 2.0 Percent Higher Over the Year”

The Consumer Price Index for All Urban Consumers (CPI-U) in the Northeast region rose 0.5 percent in February, the U.S. Bureau of Labor Statistics reported today. Sheila Watkins, the Bureau’s regional commissioner, noted that the recent increase was mostly due to a 0.4-percent rise in the all items less food and energy index. Prices were also higher for both energy (1.3 percent) and food (0.5 percent) over the month. Within the energy index, higher gasoline prices led the recent increase."

"Over the last 12 months, the CPI-U increased 2.0 percent. The index for all items less food and energy advanced 1.1 percent over the year. Prices were also higher for both energy (9.8 percent) and food (2.5 percent) since February 2010.”

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

Midwest Region

Midwest Region Consumer Price Index – February 2011

“Prices in the Midwest up 0.3 percent in February and 2.2 percent higher over the year”

The Consumer Price Index for All Urban Consumers (CPI-U) in the Midwest rose 0.3 percent in February the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Stanley W. Suchman noted that the index for energy advanced 1.2 percent and the index for food was up 0.2 percent. The index for all items less food and energy also increased 0.2 percent."

"Over the last 12 months the CPI-U rose 2.2 percent. The energy index, which includes motor fuel and household fuels, was up 11.3 percent since last February and the index for food rose 2.2 percent. Excluding food and energy, the CPI-U increased 1.1 percent over the year.

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

South Region

Consumer Price Index for the South – February 2011

 “Prices in the South up 0.5 percent over the month and 2.2 percent over the year”

The Consumer Price Index for All Urban Consumers (CPI-U) for the South increased 0.5 percent in February, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Janet S. Rankin noted that prices advanced for energy, food, and all items less food and energy. Within the all items less food and energy group, shelter, apparel, and new vehicles were among those indexes that recorded increases."

"Over the last 12 months, the CPI-U advanced 2.2 percent. The index for all items less food and energy rose 1.1 percent over the year.”

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

West Region

Consumer Price Index, West Region – January 2011

“Area Prices Were Up 0.5 Percent Over the Past Month, Up 1.4 Percent From a Year Ago.”

Prices in the West region, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), increased 0.5 percent in January, the U.S. Bureau of Labor Statistics reported today. Regional Commissioner Richard J. Holden noted that the January increase was influenced by higher prices for gasoline and groceries."

"Over the last 12 months, the CPI-U rose 1.4 percent. Energy prices advanced 7.2 percent, largely the result of an increase in the price of gasoline. The index for all items less food and energy advanced 0.8 percent since January 2010.

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

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:  www.bls.gov/regions/cpi.asp

[Teacher Note:  Assign groups of students to the four regions.  They can examine their assigned region's data 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. 

BLS Link: www.bls.gov/fls/

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

Figure 4:  Consumer Price Index in 9 Countries
Percent Change from the 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 1.6 1.8 -0.7 1.5 1.1 1.5 1.3 0.7 4.6
  Source:  BLS:  ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/flscpim.txt

 What nations have experienced more or less inflation than the United States during this time period?

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."

Note that the United Kingdom has experienced higher levels of annual price increases over the past several years than the other nations.

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 tool to search for price level data for many nations.  You can select countries and time periods.  Students can use this online tool to learn about different countries or regions.]

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) 288.177
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 0.0027 x 100
Equals Percent Change (annual) 0.27%

 

[Teacher Note: given the levels of CPI data from one period to another, nationally, by region or local area, students should be able to use this formula to determine the rate of inflation.]

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

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.

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)?
 
[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 in most sectors, with 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.

Energy priceso, expecially gasoline and heating fuel have jumped significantly in the past couple of months, as they have several times in recent years.  In the past, the prices have gradually fallen back to near "normal" levels.  Will they drop again?

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?