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Consumer Price Index

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

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Consumer Price Index

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  1. 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.”

  2. 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

  3. CPI is an Index 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?

  4. 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

  5. Fixed market baskets for a student price index

  6. 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.

  7. 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

  8. CPI • Consumer Price Index • Last 8 years of CPIs

  9. 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:

  10. 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%

  11. 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

  12. 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

  13. 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)

  14. 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?

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