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 According to the Bureau of Labor Statistics: The CPI directly affects incomes of over 80 million people.

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 2016: $50,874 Did the price really go up after inflation? Carleton s tuition in 1956: $730.00

CPI is an Index Number value base number index number = 100 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?

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

Fixed market baskets for a student price index Good/service 1980 quantity 1980 price 1980 cost Pizza 100 $7 each $700 Textbooks 20 $40 each $800 Haircuts 5 $5 each Total cost $25 $1,525 Good/service 1980 quantity 2016 price 2016 cost Pizza Textbooks Haircuts 100 20 5 $16 each $100 each $2,000 $12 each Total cost $3,660 $1,600 $60

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 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.

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

CPI More CPIs CPI for 2015, 2016? Consumer Price Index Year 2004 2005 2006 2007 2008 2009 2010 2011 CPI 188.9 195.3 201.6 207.342 215.303 214.537 218.056 224.939

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: CPI at time B dollars at time B = dollars at time A CPI at time A

Examples Carletons tuition 2001: $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%

Examples Carletons tuition 2001: $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

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 = $1.86 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

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)

Federal Minimum Wage (1960-2016) Year 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Minimum Wage $1.00 $1.25 $1.60 $2.10 $3.10 $3.35 Restate the federal minimum 0011 0010 1010 1101 0001 0100 1011 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? 42 5 1 $3.80 $4.25 $5.15 $5.15 $7.25 $7.25 3