CPI - PowerPoint

							Consumer Price Index
           Price Changes!!
 Share  with the class some prices that you
  remember have changed?
 CD player
 Movie Tickets
 Stamp
 Milk
 Prices really do change even for the exact
  same goods.
      Why should we care?
 Thereare many reasons, but the probably
 the most important reason is that we need
 to make sure that our wage increases are
 roughly in line with inflation. If wages are
 increasing more slowly than prices, then
 people's incomes are decreasing even
 though their wages are increasing
 nominally.
                   CPI
 Itwas precisely these concerns that led
  the United States Bureau of Labor
  Statistics to start publishing the CPI in
  1917. Inflation was very high during World
  War I, and there was considerable labor
  strife.
         What is the CPI?
 The Consumer Price Index (CPI) is a
 measure of the average change over time
 in the prices paid by urban consumers for
 a market basket of consumer goods and
 services.
        How is the CPI used?
 The  CPI affects nearly all Americans
  because of the many ways it is used.
  Following are major uses:
 As an economic indicator.
 As a deflator of other economic series.
 As a means of adjusting dollar values.
      What goods and services
       does the CPI cover?
   FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full
    service meals, snacks)
   HOUSING (rent of primary residence, owners' equivalent rent, fuel oil,
    bedroom furniture)
   APPAREL (men's shirts and sweaters, women's dresses, jewelry)
   TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle
    insurance)
   MEDICAL CARE (prescription drugs and medical supplies, physicians'
    services, eyeglasses and eye care, hospital services)
   RECREATION (televisions, toys, pets and pet products, sports equipment,
    admissions);
   EDUCATION AND COMMUNICATION (college tuition, postage, telephone
    services, computer software and accessories);
   OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts
    and other personal services, funeral expenses).
 Is the CPI the best measure of inflation?

 Inflation has been defined as a process of
  continuously rising prices or, of a continuously
  falling value of money.
 The CPI measures inflation as experienced by
  consumers in their day-to-day living expenses;
                  Inflation
 Inflationis defined as the percentage
  increase in the CPI for a given year
 For example, the CPI in 1997 was 160.5;
  in 1998 it was 163.0.
 The inflation rate for 1998 was
        (163.0 – 160.5)
             160.5
        = 1.6%
       How Do We Use the CPI?
 In 1990, gasoline cost $1.16 per gallon (on
  average). In 1997, the average price was
  $1.23. Did the cost of gasoline go up or
  go down?
 $1.16 and $1.23 are called current prices.
  According to these current prices, it looks
  like gas got more expensive. Is this
  accurate?
 Let’s compare the prices taking into
  account the changing value of money
We wish to know:

$1.16 in 1990 dollars is equivalent to x in 1997 dollars?

160.50 (1997 CPI)              x (1997 dollars)
130.70 (1990 CPI)       =      1.16 (1990 dollars)

x = (160.50 / 130.70) * 1.16
x = 1.42

So when Americans paid $1.16 per gallon for gasoline in
1990, it was equivalent to someone paying $1.42 in 1997,
which is considerably more than what they were actually
paying in 1997 ($1.23). The $1.42 value is what we call
constant dollars.

The price of gasoline was cheaper in 1997 than in 1990!
            1 dz of Eggs
 Let’s open file CPI.xls
 In 1925 cost $0.55
 In 2008 cost $1.09
 Let’s Convert the current 1925 value of
  $0.55 to constant 2008 dollars to
  determine the answer.
 Was 1 dz of Eggs more expensive in 2008
  or did it “cost” less than in 1925?
           ½ gallon of milk
 In 1920 it costs $0.33
 In 2008 it costs $1.29
 Convert the current 1920 value of $0.33 to
  constant 2008 dollars to determine the
  answer.
 Was ½ gallon of milk more expensive in
  2008 or did it “cost” less than in 1920?
                   Gas
 Data   shows that the average price of a
  gallon of gasoline (regular) in 1976 was
  $0.64. In 1998 it was $1.06.
 Convert the current 1976 value of $0.64 to
  constant 1998 dollars to determine your
  answer.
 Was gasoline more expensive in 1998 or
  did it “cost” less than in 1976?
       Red delicious apples
 In1989, red delicious apples cost on
  average $0.57 per pound. In 1995, they
  cost $0.83 per pound.
 Were apples more or less expensive in
  1995 than in 1989?
                  T-Shirt
 In1912 a T-shirt cost $0.45. In 2008 a t-
  shirt cost $10. Which one is more
  expensive?
      Let’s Try Another One
A  1966 Schwinn 5-Speed Fastback bicycle
  cost $69.95
 What would that cost today?
      Let’s Try Another One
       2008 CPI by 1966 CPI and multiply
 Divide
 by $69.95

 (215.3   / 32.4) * 69.95 = $464.82