Understanding Consumer Price Data

1.         Ask: What is
inflation?  Student responses will vary,
but generally will be something about higher prices. 

2.         Generalize
this BLS definition of inflation: “a process of continuously rising prices, or
equivalently, of a continuously falling value of money.

Clarify:  “continuously rising prices” (most or
all prices, not just individual prices) over some period of time.

Clarify:  “falling value of money” or your income
does not purchase as many goods and services.

3.         Ask:  What does it mean to you when your income
cannot purchase as many goods and services?

Generalize about “standard of living” or the amount of wants
you can satisfy with your income. 
Inflation reduces your ability to satisfy your wants.

4.         Go to the
Bureau of Labor Statistics web page on Consumer Price Index, http://www.bls.gov/cpi/.

Review the basic definitions of consumer prices, items 1-9,
“CPI FAQs, http://www.bls.gov/cpi/cpifaq.htm

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.

The CPI represents
all goods and services purchased for consumption by the reference population (U
or W) BLS has classified all expenditure items into more than 200 categories,
arranged into eight major groups. Major groups and examples of categories in
each are as follows:

•  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).

Also included within these major groups are various
government-charged user fees, such as water and sewerage charges, auto
registration fees, and vehicle tolls. In addition, the CPI includes taxes (such
as sales and excise taxes) that are directly associated with the prices of
specific goods and services. However, the CPI excludes taxes (such as income
and Social Security taxes) not directly associated with the purchase of
consumer goods and services.

The CPI does not include investment items, such as stocks,
bonds, real estate, and life insurance. (These items relate to savings and not
to day-to-day consumption expenses.)

NOTE: For more
background information, go to Chapter 17, “Consumer Price Index,” BLS
Handbook of Methods, http://www.bls.gov/opub/hom/pdf/homch17.pdf.

5.   Explain that the
actual level of the CPI is important over time, but the important factor for
consumers is the short-term change in the price level.

Explain how the change (increase or decrease) in the CPI is
determined:

Use this example:

1.         What is the
measurement of the current CPI (market basket)?          250

2.         What was the previous month’s CPI?                                                     240

3.         What was the
monthly increase (decrease)?                                           10

4.         Divide the
change by the previous month CPI.                                    
.04

The change in the CPI from month 1 to month 2 is .04
percent.  This can be “annualized” by
multiplying by 12 (for generalization purposes only.)

.04 x 12 months = 8 percent (annualized rate)

6.         For lessons
on the consumer price index, go to www.EconEdLink.org.   Sort for grade 9-12 lessons on “Focus on
Economic Data: Consumer Price Index.”

The Focus on Economic Data lessons on the consumer price
index are published monthly, September through May. 

NOTE: BLS CPI data is released monthly, on the second Friday of each
month.  http://www.bls.gov/news.release/cpi.nr0.htm

7.         Summarize
the importance of measuring the CPI, according to the BLS:

“The CPI is the most widely used measure of inflation and is
sometimes viewed as an indicator of the effectiveness of government economic
policy. It provides information about price changes in the Nation's economy to
government, business, labor, and private citizens and is used by them as a
guide to making economic decisions. In addition, the President, Congress, and
the Federal Reserve Board use trends in the CPI to aid in formulating fiscal
and monetary policies.”

“An interesting example is the use of the CPI as a deflator
of the value of the consumer's dollar to find its purchasing power. The
purchasing power of the consumer's dollar measures the change in the value to
the consumer of goods and services that a dollar will buy at different dates.
In other words, as prices increase, the purchasing power of the consumer's
dollar declines.

Discuss generally how understanding price level changes can
benefit economic decision-making.

8.  Review the recent history of the CPI, http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_num...

Discuss how price level changes may be irregular form month to month, dependant on a variety of factors.

One key factor is changes in energy prices (primarily oil), which are generally more volatile - changing more radically from month to month.  Note that some economists look at the "core" CPI, which does not include the more volatile energy and food prices.

BLS information about the core CPI:  http://www.bls.gov/cpi/cpiqa.htm#Question_1.  See questions 1-3.