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

CPI How to compare prices from year to year? – Carletons tuition 2001: $25,371 – Carletons tuition 2011: $42,690 Did the price really go up after inflation? Carletons tuition in 1956: $730.00

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) Carletons 2011 tuition relative to 2001 – (42,690 / 25,371 ) x 100 = Carleton tuition index number for 2011, with 2001 as base period, is Tuition has increased 68.26% since 2001 Whats Carletons 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

Good/service1980 quantity1980 price1980 cost Pizza100$7 each$700 Textbooks20$40 each$800 Haircuts5$5 each$25 Total cost$1,525 Good/service1980 quantity2012 price2012 cost Pizza100$16 each$1,600 Textbooks20$100 each$2,000 Haircuts5$12 each$60 Total cost$3,660 Fixed market baskets for a student price index

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 = Student prices increased 140% from 1980 to 2012, about one-and-a-half times.

Using the CPI CPI is a market basket price index based on hundreds of items CPI base period is : = 100 Having an annual price index allows us to convert amounts at different times into dollars of the same year Historically 20 th century was time of inflation--- prices rose throughout the century increasing rapidly after 1973

CPI Consumer Price Index Last 8 years of CPIs YearCPI

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:

Examples – Carletons tuition 2001: $25,371 vs. 2011: $42,690 Tuition rose nominally from $25,371 to $42,690 Nominal tuition rose ( )/25371 = 68.26% But the comparison should be made in constant dollars 2011 dollars = 2001 dollars * (2011 CPI/2001 CPI) = $25,371 * ( /177.1) = $32,224 $25, dollars = $32, dollars In constant (2011) dollars, tuition rose from $32,224 to $42,690 Tuition rose in real terms by ( )/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/ ) = $33,611 So $42, dollars is equal to $33, 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 were working in constant dollars

Example – Pizza 1962: The price of a slice of pizza in Bostons Park Street subway station was 25¢ In todays prices thats (25¢) * ( / 30.2) = ¢ = $1.86 A pizza slice thats $2.50 today rose ( )/.25 = 9 = 900% (10 fold) in nominal terms. The price has increased ( )/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)

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? YearMinimum Wage 1960$ $ $ $ $ $ $ $ $5.15 $7.25