Consumer Price Index

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Consumer Price Index

• Governments 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
• Bureau of Labor Statistics Directly affects
  incomes of over 80 million people

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CPI

• http//www.bls.gov/news.release/pdf/cpi.pdf
• How to compare prices from year to year?
• Carletons tuition (comprehensive) 1980 6,940
• Carletons tuition 2003 34,395
• Did the price go up? What about inflation?
• A dollar in 2003 doesnt buy as much as a dollar
  in 1980, or a dollar in 1950, or a dollar in
  1920.

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Index number

• Measures price relative to base period
• Carleton tuition
• (34395 / 6940 ) x 100 495.61
• Carleton tuition index number for 2003 with
  1980 as base period is 495.61
• Tuition has increased 395.61 (almost quadrupled)
  since 1980
• CPI base period is 1984 1982-184 100

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Student Price Index

• Compare cost of the same collection of goods and
  services over time
• Same goods and services that cost 1,525 in 1980
  cost 2,850 in 2000.
• Student Price Index (1980100) is
• (2850/1525) x 100 186.89

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Using the CPI

• CPI is a market basket price index based on
  hundreds of items
• Allows us to convert amounts into dollars of
  same year
• Historically 20th century was time of
  inflation---prices rose throughout the century
  increasing rapidly after 1973

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CPI

• ftp//ftp.bls.gov/pub/special.requests/cpi/cpiai.t
  xt

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Adjusting for changes in buying power

• Constant dollars, real income means dollars
  represent same buying power even though they may
  describe different years
• To convert an amount in dollars at time A to the
  amount with the same buying power at time B

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Examples Carletons tuition

• What is 1980s 6,940 tuition equivalent to
  today?
• 2003 dollars
• 1980 dollars (2003 CPI/1980 CPI)
• 6,940 (185.2/82.4) 15,598
• Tuition rose nominally from 6,940 to 34,395
• But should compare tuitions in constant 2003
  dollars, that is, 34,395 to 15,598
• Tuition rose by (34395-15598)/15598 120.5

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Examples A personal trauma

• 1962 The price of a DC Superman comic book goes
  up from 10 to 12
• Today its 2.95
• (12) (185.2 / 30.2) 74 is what it should be

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Exercise The Minimum Wage

• Restate the minimum wage in constant 1960 dollars
• Make two line graphs on the same axes, showing
  the actual minimum wage and the minimum wage in
  constant dollars
• Explain what your graph shows about the history
  of the minimum wage

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Minimum wage


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Carleton Tuition
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CPI A closer look

• Who is covered?
• CPI market basket represents purchases of people
  living in urban areas
• About 80 of U.S. population covered
• How is market basket chosen?
• By sampling!
• Data from 29,000 households
• Basket items are weighted

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CPI A closer look

• How are prices determined?
• By sampling!
• Survey of 16,800 households
• Each month, BLS records 80,000 prices in 85
  cities at a sample of stores that represent
  actual buying habits
• Market basket changes over time
• From LP records to CDs from beef to tofu

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CPI controversies

• Does a fixed basket approach overstate
  inflation?
• If beef prices go up and rice prices stay the
  same, people will eat more rice
• Should market basket reflect these changes in
  consumption?
• Or should index account for this decline in
  standard of living?

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CPI controversy

• Old method
• Last year I bought 1 head of iceberg and 1 head
  of romaine lettuce at 1.00 each, spending 2.00
  total
• Now price of romaine rises to 1.50 a head
• I now spend 1.00 1.50 2.50, 25 increase
• New method
• Since romaine went up Ill reduce how much
  romaine I buy but keep spending the same amount
  for each
• I now buy 1.225 heads of iceberg and .816 heads
  of romaine spending the same on each, since
• 1.225 x (1) .816 x (1.50).
• Now Ive spent 1.225 1.225 2.45, 22.5
  increase

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CPI and government statistics

• What it is CPI measures prices of goods and
  services over time
• What it is not Doesnt measure changes to
  standard of living
• CPI and government statistics need to be free
  from political influence to be accurate and
  timely
• Canada has a single statistical office (see
  www.statcan.ca) ranked first among government
  statistical agencies
• U.S. has 72 federal statistical offices