Transcript Consumer Price Index

Consumer Price Index
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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
Bureau of Labor Statistics: “Directly affects incomes
of over 80 million people”
CPI
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http://www.bls.gov/news.release/pdf/cpi.pdf
How to compare prices from year to year?
– Carleton’s tuition (comprehensive) 1980: $6,940
– Carleton’s tuition 2003: $34,395
Did the price go up? What about inflation?
A dollar in 2003 doesn’t buy as much as a dollar in
1980, or a dollar in 1950, or a dollar in 1920.
Index number
value
index number =
100
base number
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Measures price relative to base period
Carleton tuition
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(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”
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
2000 price
2000 cost
Pizza
100
$13 each
$1,300
Textbooks
Haircuts
20
5
$75 each $1,500
$10 each $50
Total cost $2,850
Student Price Index
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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 (1980=100) is
(2850/1525) x 100 = 186.89
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
CPI
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ftp://ftp.bls.gov/pub/special.requests/cp
i/cpiai.txt
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:
dollars at time B = dollars at time A 
CPI at time B
CPI at time A
Examples – Carleton’s tuition
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What is 1980’s $6,940 tuition equivalent
to today?
2003 dollars
= 1980 dollars * (2003 CPI/1980 CPI)
= $6,940 * (185.2/82.4) = $15,598
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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 =
Examples – A personal trauma
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1962: The price of a DC Superman
comic book goes up from 10¢ to 12¢
Today it’s $2.95
(12¢) * (185.2 / 30.2) = 74¢ is what it
should be
Exercise: The Minimum Wage
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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
Year
Minimum Wage
1960
1965
1970
$1.00
$1.25
$1.60
1975
1980
1985
1990
1995
2000
2003
$2.10
$3.10
$3.35
$3.80
$4.25
$5.15
$5.15
The Minimum Wage
in constant 1960wage
dollars
Minimum
6
5
4
3
Value
2
1
MINW AGE
0
CONSTANT
1960
1970
1965
YEAR
1980
1975
1990
1985
2000
1995
Miss ing
2003
Carleton Tuition
CPI: A closer look
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Who is covered?
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CPI market basket represents purchases of
people living in urban areas
About 80% of U.S. population covered
How is market basket chosen?
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By sampling!
Data from 29,000 households
Basket items are weighted
CPI: A closer look
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How are prices determined?
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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
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From LP records to CDs; from beef to tofu
CPI controversies
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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?
CPI controversy
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Old method
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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
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Since romaine went up I’ll 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).
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Now I’ve spent $1.225 + $1.225 = $2.45, 22.5%
increase
CPI and government statistics
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What it is: CPI measures prices of goods and
services over time
What it is not: Doesn’t 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