Consumer Price Index 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 Bureau of Labor Statistics: “Directly affects incomes of over 80 million people”

CPI How to compare prices from year to year? – Carleton’s tuition (comprehensive) 1980: $6,940 – Carleton’s tuition 2003: $34,395 Did the price go up? What about inflation? A dollar in 2003 doesn’t buy as much as a dollar in 1980, or a dollar in 1950, or a dollar in 1920.

Index number Measures price relative to base period Carleton tuition (34395 / 6940 ) x 100 = “Carleton tuition index number” for 2003 with 1980 as base period is Tuition has increased % (almost quadrupled) since 1980 CPI base period is 1984: “ = 100”

Good/service1980 quantity1980 price1980 cost Pizza100$7 each$700 Textbooks20$40 each$800 Haircuts5$5 each$25 Total cost$1,525 Good/service1980 quantity2000 price2000 cost Pizza100$13 each$1,300 Textbooks20$75 each$1,500 Haircuts5$10 each$50 Total cost$2,850

Student Price Index Compare cost of the same collection of goods and services over time Same goods and services that cost $1,525 in 1980 cost $2,850 in Student Price Index (1980=100) is (2850/1525) x 100 =

Using the CPI  CPI is a market basket price index based on hundreds of items  Allows us to convert amounts into dollars of same year  Historically 20 th century was time of inflation---prices rose throughout the century increasing rapidly after 1973

CPI ftp://ftp.bls.gov/pub/special.requests/c pi/cpiai.txt ftp://ftp.bls.gov/pub/special.requests/c pi/cpiai.txt

Adjusting for changes in buying power  “Constant dollars,” “real income” means dollars represent same buying power even though they may describe different years  To convert an amount in dollars at time A to the amount with the same buying power at time B:

Examples – Carleton’s tuition What is 1980’s $6,940 tuition equivalent to today? 2003 dollars = 1980 dollars * (2003 CPI/1980 CPI) = $6,940 * (185.2/82.4) = $15,598 Tuition rose nominally from $6,940 to $34,395 But should compare tuitions in constant 2003 dollars, that is, $34,395 to $15,598 Tuition rose by ( )/15598 = 120.5%

Examples – A personal trauma 1962: The price of a DC Superman comic book goes up from 10¢ to 12¢ Today it’s $2.95 (12¢) * (185.2 / 30.2) = 74¢ is what it should be

Exercise: The Minimum Wage Restate the minimum wage in constant 1960 dollars Make two line graphs on the same axes, showing the actual minimum wage and the minimum wage in constant dollars Explain what your graph shows about the history of the minimum wage YearMinimum Wage 1960$ $ $ $ $ $ $ $ $5.15

Minimum wage

Carleton Tuition

CPI: A closer look Who is covered? CPI market basket represents purchases of people living in urban areas About 80% of U.S. population covered How is market basket chosen? By sampling! Data from 29,000 households Basket items are weighted

CPI: A closer look How are prices determined? By sampling! Survey of 16,800 households Each month, BLS records 80,000 prices in 85 cities at a sample of stores that represent actual buying habits Market basket changes over time From LP records to CDs; from beef to tofu

CPI controversies Does a “fixed basket” approach overstate inflation? If beef prices go up and rice prices stay the same, people will eat more rice Should market basket reflect these changes in consumption? Or should index account for this decline in standard of living?

CPI controversy Old method Last year I bought 1 head of iceberg and 1 head of romaine lettuce at $1.00 each, spending $2.00 total Now price of romaine rises to $1.50 a head I now spend $ $1.50 = $2.50, 25% increase New method Since romaine went up I’ll reduce how much romaine I buy but keep spending the same amount for each I now buy heads of iceberg and.816 heads of romaine spending the same on each, since x ($1) =.816 x ($1.50). Now I’ve spent $ $1.225 = $2.45, 22.5% increase

CPI and government statistics What it is: CPI measures prices of goods and services over time What it is not: Doesn’t measure changes to standard of living CPI and government statistics need to be free from political influence to be accurate and timely Canada has a single statistical office (see ranked first among government statistical agencies U.S. has 72 federal statistical offices