Consumer Price Index

CPI is the government’s “most important” statistic Announced monthly by Bureau of Labor Statistics Measures changes in prices of goods and services

over time Affects elections, economy, government policies,

Social Security, pensions According to the Bureau of Labor Statistics: “The

CPI directly affects incomes of over 80 million people.”

CPI

http://www.bls.gov/news.release/pdf/cpi.pdf How to compare prices from year to year?

– Carleton’s tuition 2001: $25,371– Carleton’s tuition 2011: $42,690

Did the price really go up after inflation? Carleton’s tuition in 1956: $730.00

CPI is an Index Number

valueindex number = 100base number

An index number measures the value of a variable relative to a base period (the percent change from a base period)

Carleton’s 2011 tuition relative to 2001– (42,690 / 25,371 ) x 100 = 168.26

Carleton tuition index number for 2011, with 2001 as base period, is 168.26

Tuition has increased 68.26% since 2001 What’s Carleton’s tuition index number relative to 1956? How

much has tuition increased since 1956?

Fixed market basket price index

What about inflation? CPI attempts to index the price of all goods

and services CPI is an index number for the total cost of a

fixed collection of goods and services This is called a fixed market basket price

index and is based on hundreds of items

Good/service 1980 quantity 1980 price 1980 cost

Pizza 100 $7 each $700

Textbooks 20 $40 each $800

Haircuts 5 $5 each $25

Total cost $1,525

Good/service 1980 quantity 2012 price 2012 cost

Pizza 100 $16 each $1,600Textbooks 20 $100 each $2,000Haircuts 5 $12 each $60

Total cost $3,660

Fixed market baskets for a student price index

Student Price Index (SPI)

SPI will compare the cost of the same collection of goods and services over time

The same goods and services that cost $1,525 in 1980, cost $3,660 today.

SPI for 2012 with 1980 as a base period is (3660/1525) x 100 = 240.00

Student prices increased 140% from 1980 to 2012, about one-and-a-half times.

Using the CPI

CPI is a market basket price index based on hundreds of items

CPI base period is 1982-84: “1982-84 = 100” Having an annual price index allows us to convert

amounts at different times into dollars of the same year

Historically 20th century was time of inflation---prices rose throughout the century increasing rapidly after 1973

CPI

Consumer Price Index Last 8 years of CPIs Year CPI

2004 188.9

2005 195.3

2006 201.6

2007 207.342

2008 215.303

2009 214.537

2010 218.056

2011 224.939

Adjusting for changes in buying power

“Constant dollars,” “real income” means dollars represent same buying power even though they may describe different years

Basic Conversion Formula: To convert an amount in dollars at time A to the amount with the same buying power at time B:

CPI at time Bdollars at time B = dollars at time A

CPI at time A

Examples – Carleton’s tuition2001: $25,371 vs. 2011: $42,690

Tuition rose nominally from $25,371 to $42,690 Nominal tuition rose (42690-25371)/25371 = 68.26% But the comparison should be made in constant dollars 2011 dollars

= 2001 dollars * (2011 CPI/2001 CPI) = $25,371 * (224.939/177.1) = $32,224

$25,371 2001 dollars = $32,224 2011 dollars In constant (2011) dollars, tuition rose from $32,224 to $42,690 Tuition rose in real terms by (42690-32224)/32224 = 32.5%

Examples – Carleton’s tuition2001: $25, 371 vs. 2011: $42,690

We could have done the calculation in constant 2001 dollars instead of 2011 dollars

2001 dollars = 2011 dollars * (2001 CPI/2011 CPI)= $42,690 * (177.1/224.939) = $33,611

So $42,690 2011 dollars is equal to $33,611 2001 dollars In constant (2001) dollars, tuition rose from $25,371 to $33,611 Tuition rose in real terms by (33,611-25,371)/25,371 = 32.5% We get the same percentage increase as before because we’re

working in constant dollars

Example – Pizza

1962: The price of a slice of pizza in Boston’s Park Street subway station was 25¢

In today’s prices that’s (25¢) * (224.939 / 30.2) = 186.21¢ = $1.86 A pizza slice that’s $2.50 today rose (2.50-.25)/.25 =

9 = 900% (10 fold) in nominal terms. The price has increased (2.50-1.86)/1.86 = 0.34 =

34% in real dollars

Notes on the CPI

The CPI represents the purchases of people living in urban areas (covers about 80% of U.S. population)

The market basket (goods and services) is determined by the Consumer Expenditure Survey of 29,000 households (they use random sampling)

Prices are also determined by surveys (80,000 prices in 85 cities at a representative sample of stores)

4251 3

0011 0010 1010 1101 0001 0100 1011

Exercise: The Minimum Wage• Restate the minimum wage

in 1970 dollars• Make two line graphs on

the same axes, showing the actual wage and the real wage in constant 1970 $$

• Explain what your graph shows about the history of the minimum wage

• How much has the minimum wage increased since 1970, both nominally and in real terms?

Year Minimum Wage

1960 $1.001965 $1.251970 $1.601975 $2.101980 $3.101985 $3.351990 $3.801995 $4.25200020052010

$5.15$5.15$7.25