Consumer Price Index

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Consumer Price Index
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Price Changes!!

• Share with the class some prices that you
  remember have changed?
• CD player
• Movie Tickets
• Stamp
• Milk
• Prices really do change even for the exact same
  goods. 

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Why should we care?

• There are many reasons, but the probably the most
  important reason is that we need to make sure
  that our wage increases are roughly in line with
  inflation.  If wages are increasing more slowly
  than prices, then people's incomes are decreasing
  even though their wages are increasing nominally.

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CPI

• It was precisely these concerns that led the
  United States Bureau of Labor Statistics to start
  publishing the CPI in 1917.  Inflation was very
  high during World War I, and there was
  considerable labor strife.

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What is the CPI?

• The Consumer Price Index (CPI) is a measure of
  the average change over time in the prices paid
  by urban consumers for a market basket of
  consumer goods and services.

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How is the CPI used?

• The CPI affects nearly all Americans because of
  the many ways it is used. Following are major
  uses
• As an economic indicator.
• As a deflator of other economic series.
• As a means of adjusting dollar values.

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What goods and services does the CPI cover?

• FOOD AND BEVERAGES (breakfast cereal, milk,
  coffee, chicken, wine, full service meals,
  snacks)
• HOUSING (rent of primary residence, owners'
  equivalent rent, fuel oil, bedroom furniture)
• APPAREL (men's shirts and sweaters, women's
  dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares,
  gasoline, motor vehicle insurance)
• MEDICAL CARE (prescription drugs and medical
  supplies, physicians' services, eyeglasses and
  eye care, hospital services)
• RECREATION (televisions, toys, pets and pet
  products, sports equipment, admissions)
• EDUCATION AND COMMUNICATION (college tuition,
  postage, telephone services, computer software
  and accessories)
• OTHER GOODS AND SERVICES (tobacco and smoking
  products, haircuts and other personal services,
  funeral expenses).

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Is the CPI the best measure of inflation?

• Inflation has been defined as a process of
  continuously rising prices or, of a continuously
  falling value of money.
• The CPI measures inflation as experienced by
  consumers in their day-to-day living expenses

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Inflation

• Inflation is defined as the percentage increase
  in the CPI for a given year
• For example, the CPI in 1997 was 160.5 in 1998
  it was 163.0.
• The inflation rate for 1998 was
• (163.0 160.5)
• 160.5
• 1.6

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How Do We Use the CPI?

• In 1990, gasoline cost 1.16 per gallon (on
  average). In 1997, the average price was 1.23.
  Did the cost of gasoline go up or go down?
• 1.16 and 1.23 are called current prices.
  According to these current prices, it looks like
  gas got more expensive. Is this accurate?
• Lets compare the prices taking into account the
  changing value of money

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We wish to know 1.16 in 1990 dollars is
equivalent to x in 1997 dollars? 160.50 (1997
CPI) x (1997 dollars) 130.70 (1990 CPI) 1.16
(1990 dollars) x (160.50 / 130.70) 1.16 x
1.42 So when Americans paid 1.16 per gallon for
gasoline in 1990, it was equivalent to someone
paying 1.42 in 1997, which is considerably more
than what they were actually paying in 1997
(1.23). The 1.42 value is what we call
constant dollars. The price of gasoline was
cheaper in 1997 than in 1990!
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1 dz of Eggs

• Lets open file CPI.xls
• In 1925 cost 0.55
• In 2008 cost 1.09
• Lets Convert the current 1925 value of 0.55 to
  constant 2008 dollars to determine the answer.
• Was 1 dz of Eggs more expensive in 2008 or did it
  cost less than in 1925?

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½ gallon of milk

• In 1920 it costs 0.33
• In 2008 it costs 1.29
• Convert the current 1920 value of 0.33 to
  constant 2008 dollars to determine the answer.
• Was ½ gallon of milk more expensive in 2008 or
  did it cost less than in 1920?

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Gas

• Data shows that the average price of a gallon of
  gasoline (regular) in 1976 was 0.64. In 1998 it
  was 1.06.
• Convert the current 1976 value of 0.64 to
  constant 1998 dollars to determine your answer.
• Was gasoline more expensive in 1998 or did it
  cost less than in 1976?

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Red delicious apples

• In 1989, red delicious apples cost on average
  0.57 per pound. In 1995, they cost 0.83 per
  pound.
• Were apples more or less expensive in 1995 than
  in 1989?

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T-Shirt

• In 1912 a T-shirt cost 0.45. In 2008 a t-shirt
  cost 10. Which one is more expensive?

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Lets Try Another One

• A 1966 Schwinn 5-Speed Fastback bicycle cost
  69.95
• What would that cost today?

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Lets Try Another One

• Divide 2008 CPI by 1966 CPI and multiply by
  69.95
• (215.3 / 32.4) 69.95 464.82