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 2016: $50,874
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 2016 tuition relative to 2001
(50,874 / 25,371 ) x 100 =
Carleton tuition index number for 2016, with 2001 as base period, is
Tuition has increased % since 2001
What is 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
Good/service
1980 quantity
1980 price
1980 cost
Pizza
100
$7 each
$700
Textbooks 20
$40 each
$800
Haircuts 5
$5 each
$25
Total cost
$1,525
Good/service
1980 quantity
2016 price
2016 cost
Pizza
100
$16 each
$1,600
Textbooks 20
$100 each
$2,000
Haircuts 5
$12 each
$60
Total cost
$3,660

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 2016 with 1980 as a base period is
(3660/1525) x 100 =
Student prices increased 140% from 1980 to 2016, almost 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 : “ = 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

10. CPI More CPIs CPI for 2015, 2016? Consumer Price Index Year CPI 2004
188.9
2005
195.3
2006
201.6
2007
2008
2009
2010
2011

11. 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:

12. Examples – Carleton’s 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%

13. Examples – Carleton’s 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 we’re working in constant dollars

14. 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¢) * ( / 30.2) = ¢ = $1.86
A pizza slice that’s $2.50 today rose ( )/.25 = 9 = 900% (10 fold) in nominal terms.
The price has increased ( )/1.86 = 0.34 = 34% in real dollars

15. 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)

16. Federal Minimum Wage (1960-2016)
Year
Minimum Wage
1960
$1.00
1965
$1.25
1970
$1.60
1975
$2.10
1980
$3.10
1985
$3.35
1990
$3.80
1995
$4.25
2000
2005
2010
2015
$5.15
$7.25
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?