CPI is the 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 ID: 484936
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Slide1
Consumer Price Index
CPI is the government’s “most important” statisticAnnounced monthly by Bureau of Labor StatisticsMeasures changes in prices of goods and services over timeAffects elections, economy, government policies, Social Security, pensionsAccording to the Bureau of Labor Statistics: “The CPI directly affects incomes of over 80 million people.”Slide2
CPI
http://www.bls.gov/news.release/pdf/cpi.pdfHow to compare prices from year to year?Carleton’s tuition 2001: $25,371Carleton’s tuition 2016: $50,874Did the price really go up after inflation?Carleton’s tuition in 1956: $730.00Slide3
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 2016 tuition relative to 2001
(50,874 / 25,371 ) x 100 = 200.52
Carleton tuition index number for 2016, with 2001 as base period, is 200.52
Tuition has increased 100.52% since 2001
What is Carleton’s tuition index number relative to 1956? How much has tuition increased since 1956?Slide4
Fixed market basket price index
What about inflation?CPI attempts to index the price of all goods and servicesCPI is an index number for the total cost of a fixed collection of goods and servicesThis is called a fixed market basket price index and is based on hundreds of itemsSlide5
Good/service
1980 quantity
1980 price
1980 cost
Pizza
100
$7 each
$700
Textbooks
20
$40 each
$800
Haircuts5$5 each$25Total cost$1,525
Good/service1980 quantity2016 price2016 costPizza100$16 each$1,600Textbooks20$100 each$2,000Haircuts5$12 each$60Total cost$3,660
Fixed market baskets for a
student price indexSlide6
Student Price Index (SPI)
SPI will compare the cost of the same collection of goods and services over timeThe same goods and services that cost $1,525 in 1980, cost $3,660 today.SPI for 2016 with 1980 as a base period is
(3660/1525) x 100 = 240.00
Student prices increased 140% from 1980 to 2016, almost one-and-a-half times.Slide7
Using the CPI
CPI is a market basket price index based on hundreds of itemsCPI 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 yearHistorically 20th century was time of inflation---prices rose throughout the century increasing rapidly after 1973Slide8Slide9Slide10
CPI
More CPIsCPI for 2015, 2016?Consumer Price Index
Year
CPI
2004
188.9
2005
195.3
2006
201.6
2007
207.342
2008215.3032009214.5372010218.0562011224.939Slide11
Adjusting for changes
in buying power “Constant dollars,” “real income” means dollars represent same buying power even though they may describe different yearsBasic Conversion Formula: To convert an amount in dollars at time A to the amount with the same buying power at time B:Slide12
Examples – Carleton’s tuition
2001: $25,371 vs. 2011: $42,690Tuition rose nominally from $25,371 to $42,690Nominal 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%Slide13
Examples – Carleton’s tuition
2001: $25, 371 vs. 2011: $42,690We could have done the calculation in constant 2001 dollars instead of 2011 dollars2001 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 dollarsSlide14
Example – Pizza
1962: The price of a slice of pizza in Boston’s Park Street subway station was 25¢In today’s prices that is(25¢) * (224.939 / 30.2) = 186.21¢ = $1.86A 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 dollarsSlide15
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)Slide16
Federal Minimum Wage
(1960-2016)Restate the federal minimum wage in 1975 dollars
Make two line graphs on the same axes, showing the actual wage and the
real
wage in
1975 dollars
Explain what your graph shows about the history of the minimum wage
How much has the
federal minimum
wage
changed
since
1975, both nominally and in real terms?YearMinimum Wage1960$1.001965$1.251970$1.601975$2.101980$3.101985$3.351990$3.801995$4.25
2000200520102015$5.15$5.15$7.25$7.25