Prices and Price Indexes CPI, PCE, Stock Prices

Prices and Price Indexes: CPI, PCE, Stock Prices Brian Biros, Courtney Carson, Julia Mitchell, Andrew Pancoe, Amir Taylor Consumer Price Index    a measure which is used to track the change in prices for common household goods over time developed using a "market basket" approach -researchers determine the cost of a particular set of goods and services every year– then compared against the cost of same ―basket‖ from other years benchmark inflation guide for US economy Consumer Price Index  the CPI tries to approximate changes in the cost of living—that is, changes in the cost of maintaining a constant standard of living from one month to the next– Base year of 1982-1984= 100  To construct the CPI, BLS surveys the prices of thousands of goods and services (the index has more than 200 categories of items) in 38 regions, averaging the results to form a nationwide estimate of inflation.   Released monthly, usually mid-month Lagging indicator– covers data from previous month Consumer Price Index  Significance as Macroeconomic Indicator    CPI is considered to be a measure of inflation and an approximation of the cost of living. CPI, as reported by the Bureau of Labor Statistics, is used to adjust annual payments of Social Security, retirement programs, and other compensation programs. CPI generally overestimates inflation by 1.1 percentage points per year due to some sources of bias. Consumer Price Index  Developments   1996: The Boskin Commission was organized to research and analyze the measurement of CPI in the United States.  They determined that CPI was overestimating inflation and was affected by several sources of bias. Since then, the Bureau of Labor Statistics has been searching for ways to make the CPI a more accurate measure. In recent years, the C-CPI has been introduced. It is a Chained Consumer Price Index that tries to eliminate or minimize the bias caused by consumer substitutions by accounting for the expenditure in years surrounding the period for which the C-CPI is being calculated. The C-CPI and the existing CPI measure use a geometric mean in most item categories. This geometric mean estimator was introduced by the Bureau of Labor Statistics in 1999. Consumer Price Index  Current Behavior and Predictions      CPI with base period of 1982-84 = 100 November 2007: 210.036 December 2007: 207.342 January 2008: 211.080 Data from http://www.bls.gov/cpi/  Average monthly change forecasted for the next 3 months: 0.4% http://www.heritage.org/Research/Labor/images/b2040_chart4-lg.gif Index of Personal Consumption Expenditure     The PCE, personal consumption expenditure index, is a scale that measures the changes in consumer goods and prices, also generally referred to as inflation. Derived in its largest component by GDP measured by the percent change in consumer goods and services using 1992 as a base year with a value of 100. However the PCE also factors in such necessities as rent, and life insurance, and house insurance (in urban areas). Lagging indicator, released quarterly Index of Personal Consumption Expenditure  Significance as macroeconomic indicator   a means of measuring inflation When PCE is growing too fast it means that prices faced by urban consumers is growing fast, thus inflation is rising. The PCE fluctuates with the business cycle but increases steadily. The only deviation from this trend was the fourth quarter of 2006 when the PCE actually shrank. Recently, in the third quarter of 2007 the PCE rose by 2.8%. In the fourth quarter of 2007 the Index only rose by 1.9% continuing the trend of growth of the PCE  Developments  Index of Personal Consumption Expenditure  Recent Behavior http://www.bea.gov/national/nipaweb/TableView.asp#Mid Index of Personal Consumption Expenditure Prediction of Future Trends As incomes and inflation continue to grow so will prices. This will cause the PCE to continue on its trend of growth. Stock Prices of Common 500 Stock    World-renowned index includes 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. Widely regarded as the best single gauge of the U.S. equities market Stock Prices of Common 500 Stock  Weighted averages are used to calculate the S&P 500.  Companies in the index are weighted by market capitalization  the movement of the larger companies in the index effects the value of the index more than smaller companies  Market capitalization is calculated by multiplying the number of shares outstanding by the current share price. Stock Prices of Common 500 Stock    The S&P 500 is calculated daily like a stock Leading indicator Significance as macroeconomic indicator  The S&P is the second most significant indictor for large cap companies in the United States behind the Dow Jones.  The large scale companies that the S&P 500 tracks are considered to be the most influential companies in their respective industries and therefore the economy as a whole.  The individual stocks that are included in it are some of the largest companies in the US stock exchange which are still highly liquid.  Within these 500 companies approximately 75 % of the US equities market is held. This accounts for a large amount of the movement within the United State’s economy. Stock Prices of Common 500 Stock   The S&P 500 in the past three days has reduced from 1380 to 1330 but because it is an indicator of such large companies it will stay relatively constant with a slight increase in the next quarter The S.& P. fell 37.05 points, to 1,330.63  ―the current turmoil in the financial system is at its core a crisis of faith and confidence‖  NY Times SP500 S&P 500 Index (INDEX) Delayed quote data 2/29/2008 Last: Change: Open: High: Low: Volume: 1,330.63 -37.05 Percent Change: 1,364.07 Yield: 1,364.07 P/E Ratio: 1,325.42 52 Week Range: n/a -2.71% 2.07% 16.90 1,270.05 to 1,576.09 SP500 S&P 500 Index (INDEX) Delayed quote data 2/29/2008 Last: Change: Open: add to favorites High: list favorites Low: chart help Volume: 1,330.63 -37.05 Percent Change: 1,364.07 Yield: 1,364.07 P/E Ratio: 1,325.42 52 Week Range: n/a -2.71% 2.07% 16.90 1,270.05 to 1,576.09 Weekly SP 500 data over the last decade