Consumer Price Index News Release

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The latest Consumer Price Index news release
(http://www.bls.gov/news.release/pdf/cpi.pdf)
was issued today by the Bureau of Labor Statistics. Highlights are below.
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On a seasonally adjusted basis, the CPI-U increased 0.4
percent in November after rising 0.3 percent in October. The
index for all items less food and energy was unchanged in
November after increasing 0.2 percent in October.

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US factories produce more, inflation is in check

In the September 16, 2009 article "US factories produce more, inflation is in check," Associated Press economics writers Christopher S. Rugaber and Jeannine Aversa report that factory output increased more than expected in August and inflation remained low:

WASHINGTON – U.S. factories made more cars, clothing and other goods than expected in August, and inflation remained in check in the early stages of a broad economic recovery.

The Federal Reserve said Wednesday that output at the nation's factories, mines and utilities rose 0.8 percent in August. Economists surveyed by Thomson Reuters expected a 0.6 percent increase. Last month's gain marked the second straight increase after the global recession dried up the appetites of customers worldwide.

"The back to back gains in industrial production provide further evidence the recession ended around July," Joseph LaVorgna, chief U.S. economist at Deutsche Bank, wrote in a note to clients.

Meanwhile, the Labor Department reported that the so-called "core" Consumer Price Index, which excludes volatile food and energy prices, rose slightly over the 12 months ending in August. That is well within the Fed's comfort zone and means the central bank faces little pressure to raise its benchmark interest rate, a step it takes to ward off high inflation. The Fed has reduced the interest rate it charges banks for overnight loans to a record low of nearly zero in an effort to revive the economy.

Industrial production rose in a fairly broad-based pickup in August, according to the Fed data. The central bank also said production jumped 1 percent in July, twice as much as originally reported. Car manufacturing drove that gain.

Factory output — the single-biggest slice of overall industrial activity — also rose for the second straight month. It posted a 0.6 percent gain in August, following a 1.4 percent rise in July.

Auto production led the way, rising 5.5 percent last month due mainly to the government's Cash for Clunkers program. That followed a whopping 20.1 percent gain in July as General Motors and Chrysler reopened many plants that had been closed in May and June as the companies restructured and emerged from bankruptcy.

Even with production of autos and parts stripped out, manufacturing activity increased 0.4 percent last month.

On the inflation front, the CPI rose 0.4 percent in August, after a flat reading in July. Wall Street economists expected a 0.3 percent increase, according to a survey by Thomson Reuters. Prices fell 1.5 percent in the past year, as gas prices dropped sharply from record levels last summer.

The core price index rose 0.1 percent, matching expectations. It rose 1.4 percent in the 12 months ending in August, the smallest increase in more than five years.

A 1.3 percent drop in the price of cars last month, the steepest fall in nearly 37 years, held back the core index. Discounts stemming from the clunkers program — which provided rebates of up to $4,500 to consumers who traded in older cars for newer, more fuel-efficient models — caused the decline.

The stock markets rose modestly in morning trading. The Dow Jones industrial average added about 28 points, and broader indices edged up.

Gas prices rose 9.1 percent in August on a seasonally adjusted basis and accounted for 80 percent of the rise in the consumer price index. Still, gas prices are 30 percent below last year's record levels, when prices at the pump topped $4 a gallon.

Consumers have cut sharply back on their spending in response to the worst recession since the 1930s. That has made it difficult for retailers and manufacturers to raise prices, keeping inflation at its lowest levels in decades. Last month, the department said consumer prices fell 2.1 percent in the 12 months ending in July, the steepest drop since 1950.

Still, there are signs the economy is recovering and consumers may be willing to spend again. Retail sales jumped 2.7 percent in August, the Commerce Department said Tuesday, the biggest increase in more than three years.

With production rising, industrial companies idled less of their plants and equipment in August. The overall operating rate rose to 69.6 percent in, up from 69 percent in July.

Industrial companies are still operating well below capacity. The operating capacity in August was 11.3 percentage points below its average between 1972 and 2008. A healthy level is around 80 percent.

Because companies still have a lot of their plants unused, that also will be a force tamping down any inflation pressures.

Fed Chairman Ben Bernanke said Tuesday the recession is likely over, though he noted that the economy isn't likely to grow fast enough to lower unemployment anytime soon. Most economists expect the jobless rate to top 10 percent next year, up from its current 9.7 percent.

"It's still going to feel like a very weak economy for some time," Bernanke said.

Separately, the deficit in the broadest measure of foreign trade shrank in the spring to the lowest level in relation to the total economy in 18 years, another dramatic sign of how much the recession had reduced America's appetite for foreign goods.

The Commerce Department said Wednesday the deficit in the current account dropped to $98.8 billion in the April-June quarter. That represented 2.8 percent of the total economy as measured by the gross domestic product, the smallest percentage since the first quarter of 1991.

Consumer Prices Hold Steady, Easing Inflation Fears

According to the August 15, 2009 New York Times article Consumer Prices Hold Steady, Easing Inflation Fears, Jack Healy reports that consumer prices were relatively steady in July 2009:

Consumer prices in the United States were steady last month, easing concerns for now that the record deficit and huge new government spending would spur inflation.

“It could be a very large long-run problem,” said Mickey Levy, chief economist at Bank of America. “But in the near term, it’s not a problem at all.”

The drift in prices suggests that enormous slack remains in the American economy, even as the recession bottoms out and some industries restart production. Retail sales are sluggish, 14.5 million people are unemployed and many factories and other businesses are still running below capacity.

The Labor Department reported Friday that its Consumer Price Index was unchanged from June on a seasonally adjusted basis, and that prices this summer were 2.1 percent lower than last July, when soaring oil costs drove gasoline to $4 a gallon and lifted the cost of food and other products.

The drop in the last year has been the largest in almost 60 years, occurring as the global economic crisis reduced demand for many goods and services.

“The inflation story was nonsense in an environment where you have such wild excess capacity globally,” said Robert Barbera, chief economist at ITG, an investment advisory business. “I think inflation is below 2 percent for the next two years.”

In another hopeful sign for the economy, the Federal Reserve reported on Friday that industrial production in the United States rose last month, suggesting that manufacturers and major industries were ramping up assembly lines and increasing output.

The monthly increase of 0.5 percent was the first since October, when production rebounded after Hurricane Ike as refineries and other industries came back on line. Before that, industrial production had not posted a gain since December 2007, the first month of the recession.

Economists had expected no change in consumer prices in July. Excluding volatile food and energy prices, the so-called core rate of inflation rose 0.1 percent, also in line with expectations.

“For all the inflation fear-mongering, the fact remains that prices have, in the near term, declined further rather than turned upwards,” Dan Greenhaus, chief economic strategist at Miller Tabak, said in a research note. “Such price action comes despite, among other things, a $787 billion stimulus package and $1.75 trillion in asset purchase by the Federal Reserve.”

Some economists and investors have warned that the government’s rescue plans and big stimulus spending will stoke inflation as the economy heals, setting off worries about the strength of the dollar and rising interest rates.

But economists said that Friday’s numbers showed that inflation remained subdued even as oil prices more than doubled since February and interest rates on government bonds crept back from record lows.

The Federal Reserve, in its statement on Wednesday after its two-day meeting, said it expected “that inflation will remain subdued for some time.”

In July, retail prices for food and beverages fell 0.2 percent from a month earlier while gasoline prices declined 0.8 percent. Housing costs fell 0.2 percent for the month, and were down 0.7 percent from last year.

The cost of clothing actually rose 0.6 percent, mostly because of increases in the price of shoes and women’s apparel.

Transportation and health care costs edged up 0.2 percent.

Consumer prices jump 0.7 percent in June

According to "Consumer prices jump 0.7 percent in June":

By MARTIN CRUTSINGER, AP Economics Writer
July 15, 2009

WASHINGTON – The government says consumer prices shot up in June by the largest amount in 11 months, reflecting the biggest jump in gasoline prices in nearly five years.

The Commerce Department said Wednesday that inflation at the consumer level rose by 0.7 percent last month, slightly higher than the 0.6 percent increase that economists were expecting. It was the biggest one-month gain since a similar 0.7 percent increase last July.

The big jump was seen as a temporary blip, however. Inflation is not expected to be a problem any time soon given a severe recession which is keeping a lid on wage pressures.

Comparing Inflation Rates

TradingEconomics compares the inflation rates in several countries (Australia, Canada, the Euro Area, Japan, New Zealand, Switzerland, the United Kingdom, and the United States):

Inflation Rates measured by the Consumer Price Index (CPI), Year over Year (YoY)

Inflation is the rate at which the general level of prices is rising. The most well known indicator of inflation is the Consumer Price Index (CPI) which measures the average price of consumer goods and services purchased by households. High rates of inflation are often associated with fast growing economies where the demand for goods and services is higher that the country’s productive capacity. The fight against inflation is done by central banks which control the money supply by increasing or decreasing short term interest rates. For instance, the Governing Council of the European Central Bank aims at keeping annual inflation under 2% to promote price stability and sustainable growth.

(Year over year means the measurement is made in comparison to what it was at the same time in the previous year. For example, comparing the inflation rate in January 2010 with what it was in January 2009.)

U.S. Inflation Rates Since 1956

U.S. INFLATION RATES SINCE 1956
YEAR	CPI (1982-1984 = 100)	Annual Inflation Rate
1956	27.2	1.5%
1957	28.1	3.3%
1958	28.9	2.8%
1959	29.1	0.7%
1960	29.6	1.7%
1961	29.9	1.0%
1962	30.2	1.0%
1963	30.6	1.3%
1964	31.0	1.3%
1965	31.5	1.6%
1966	32.4	2.9%
1967	33.4	3.1%
1968	34.8	4.2%
1969	36.7	5.5%
1970	38.8	5.7%
1971	40.5	4.4%
1972	41.8	3.2%
1973	44.4	6.2%
1974	49.3	11.0%
1975	53.8	9.1%
1976	56.9	5.8%
1977	60.6	6.5%
1978	65.2	7.6%
1979	72.6	11.3%
1980	82.4	13.5%
1981	90.9	10.3%
1982	96.5	6.2%
1983	99.6	3.2%
1984	103.9	4.3%
1985	107.6	3.6%
1986	109.6	1.9%
1987	113.6	3.6%
1988	118.3	4.1%
1989	124.0	4.8%
1990	130.7	5.4%
1991	136.2	4.2%
1992	140.3	3.0%
1993	144.5	3.0%
1994	148.2	2.6%
1995	152.4	2.8%
1996	156.9	3.0%
1997	160.5	2.3%
1998	163.0	1.6%
1999	166.6	2.2%
2000	172.2	3.4%
2001	177.1	2.8%
2002	179.9	1.6%
2003	184.0	2.3%
2004	188.9	2.7%
2005	195.3	3.4%
2006	201.6	3.2%
2007	207.342	2.8%
2008	215.303	3.8%
2009	214.537	-0.4%
2010	218.056	1.6%
2011	224.939	3.2%

Table. Historical data for the Consumer Price Index (CPI)
and the Inflation Rate.
Source: U.S. Bureau of Labor Statistics
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Limitations of Using the Consumer Price Index (CPI) to Measure Inflation

Limitations of Using the Consumer Price Index (CPI) to Measure Inflation

1. Prices of different products rise at different rates. Consumers tend to shift their consumption away from the more expensive products and substitute cheaper products. Because the CPI uses a fixed basket of goods, it will assume people are still buying the same amount of the relatively expensive products. In reality, however, they are buying less of the expensive products. So their overall expenses are not as large as the CPI suggests.

2. Price indexes have difficulty measuring changes in quality. Consumers benefit from higher quality products. When inflation calculations use a fixed basket of goods, however, the implicit assumption is the quality does not change. A product could be more expensive because it has improved in quality. The CPI would attribute the price rise to inflation.

3. Price indexes have difficulty including new technology. Consumers benefit from new technology, but the fixed basket of goods used in the CPI will not include the newest products and technology. Thus, the CPI is an inaccurate measure of the true cost of living of a typical urban consumer.

The CPI is the primary index used to calculate the inflation rate in the United States. Because of its shortcomings, most economists think the CPI overestimates the inflation rate by 1-2%. This is why the macroeconomic policy goal is low inflation, not no inflation. When the inflation rate is reported around 1.5%, economists feel there in very little real inflation.

Estimating the Inflation Rate from the Consumer Price Index

Estimating the Inflation Rate from the Consumer Price Index

Use the following hypothetical data to calculate the inflation rate between various years.


Year
2010
2011
2012
2013
2014
2015
CPI
100
101
105
113
120
126



Earlier Year
Later Year
Inflation Rate
Earlier Year
Later Year
Inflation Rate
2010
2011
1%
2011
2015
24.75%
2010
2012
5%
2012
2013
7.62%
2010
2013
13%
2012
2014
14.29%
2010
2014
20%
2012
2015
20%
2010
2015
26%
2013
2014
6.19%
2011
2012
3.96%
2013
2015
11.50%
2011
2013
11.88%
2014
2015
5%
2011
2014
18.81%

Using a Price Index to Measure Inflation for a Simple Economy with Three Products

Using a Price Index to Measure Inflation for a Simple Economy with Three Products

Consider a simple economy, Breakfastland, which only produces three products: milk (measured in gallons), bread (measured in loaves), and breakfast cereal (measured in boxes). The following tables contain relevant data for this economy.

Product
Price in 2003
Quantity Produced in 2003
Value of Output in 2003
Milk
$3.00 per gallon
20 gallons
$60.00
Bread
$2.00 per loaf
15 loaves
$30.00
Cereal
$5.00 per box
10 boxes
$50.00
Total Value of all Output produced in 2003 (GDP)
(Valued using 2003 prices)
$140.00
Table 6. Hypothetical data for 2003 in an economy with three products.

Product
Price in 2004
Quantity Produced in 2004
Value of Output in 2004
Milk
$6.00 per gallon
30 gallons
$180.00
Bread
$3.00 per loaf
20 loaves
$60.00
Cereal
$5.50 per box
10 boxes
$55.00
Total Value of all Output produced in 2004 (GDP)
(Valued using 2004 prices)
$295.00
Table 7. Hypothetical data for 2004 in an economy with three products.

Product
Price in 2005
Quantity Produced in 2005
Value of Output in 2005
Milk
$6.60 per gallon
35 gallons
$231.00
Bread
$3.50 per loaf
25 loaves
$87.50
Cereal
$6.00 per box
15 boxes
$90.00
Total Value of all Output produced in 2005 (GDP)
(Valued using 2005 prices)
$408.50
Table 6. Hypothetical data for 2005 in an economy with three products.

There are five steps to follow when using a price index to measure inflation.

Step 1. Choose the base year and determine the basket of goods.

Step 2. Find the price of each good in each year.

Step 3. Compute the cost of the basket of goods in each year.

Step 4. Compute the price index for each year.


Step 5. Use the price index to calculate the inflation rate.



Step 1. Choose the base year and determine the basket of goods.
Let 2003 be the base year. Let the basket of goods be the output in 2003. Thus, the basket of goods contains 20 gallons of milk, 15 loaves of bread, and 10 boxes of cereal. (Note: The basket of goods does not have to be the output in the base year.)

Step 2. Find the price of each good in each year. The prices of milk, bread, and cereal in 2003, 2004, and 2005 are given in the second column of the three tables above.

Step 3. Compute the cost of the basket of goods in each year.

The basket of goods valued at 2003 prices =
(20 gallons of milk)($3 per gallon) +
(15 loaves of bread)($2 per loaf) +
(10 boxes of cereal)($5 per box) = $140.000

The basket of goods valued at 2004 prices =
(20 gallons of milk)($6 per gallon) +
(15 loaves of bread)($3 per loaf) +
(10 boxes of cereal)($5.50 per box) = $220.00

The basket of goods valued at 2005 prices =
(20 gallons of milk)($6.60 per gallon) +
(15 loaves of bread)($3.50 per loaf) +
(10 boxes of cereal)($6.00 per box) = $244.50

Step 4. Compute the price index for each year.


Assume 2003 is the base year.




Thus, the price index for 2003 is 100. The value of an index in the base year is always 100.




Thus, the price index for 2004 is 157.




Thus, the price index for 2005 is 175.



Step 5. Use the price index to calculate the inflation rate.




Calculate the inflation rate between 2003 and 2004

The inflation rate between 2003 and 2004 for this simple economy can be calculated from the price indexes above.



Thus, the rate of inflation between 2003 and 2004 is 57% in Breakfastland.



Calculate the inflation rate between 2003 and 2005

The inflation rate between 2003 and 2005 for this simple economy can be calculated from the price indexes above.




Thus, the rate of inflation between 2003 and 2005 is 75 % in Breakfastland.


Calculate the inflation rate between 2004 and 2005

The inflation rate between 2004 and 2005 for this simple economy can be calculated from the price indexes above.


Thus, the rate of inflation between 2004 and 2005 is 11.46 % in Breakfastland.

Using a Price Index to Measure Inflation for a Simple Economy with One Product

Using a Price Index to Measure Inflation for a Simple Economy with One Product

Consider a simple economy that only produces one product, widgets. The following table contains relevant data for this economy.

Year
Price of Widgets (P)
Quantity of Widgets Produced (Q)
Gross Domestic Product
2003
$0.50
10
$5.00
2004
$0.80
20
$16.00
2005
$1.00
50
$50.00
Table 5. Hypothetical data for an economy that only produces one product, widgets.

There are five steps to follow when using a price index to measure inflation.

Step 1. Choose the base year and determine the basket of goods.
Let 2003 be the base year. Let the basket of goods be the output produced in the base year. Thus the basket of goods contains 10 widgets. (Note: The basket of goods does not have to be output in the base year.)


Step 2. Find the price of each good in each year.

The prices of the widgets are given in the second column of the table.



Step 3. Compute the cost of the basket of goods in each year.

The basket of goods from 2003 valued at 2003 prices =
(10 widgets) ($.50 per widget) = $5.00

The basket of goods from 2003 valued at 2004 prices =
(10 widgets) ($.80 per widget) = $8.00

The basket of goods from 2003 valued at 2005 prices =
(10 widgets) ($1.00 per widget) = $10.00



Step 4. Compute the price index for each year.


Price index for 2003





Thus, the price index for 2003 is 100. The value of an index in the base year is always 100.


Price index for 2004





Thus, the price index for 2004 is 160.



Price index for 2005





Thus, the price index for 2005 is 200.


Step 5. Use the price index to calculate the inflation rate.



Calculate the inflation rate between 2003 and 2004

The inflation rate between 2003 and 2004 for this simple economy can be calculated from the price indexes above.


Thus, the rate of inflation between 2003 and 2004 is 60%.


Calculate the inflation rate between 2004 and 2005

The inflation rate between 2004 and 2005 for this simple economy also can be calculated from the price indexes above.



Thus, the rate of inflation between 2004 and 2005 is 25%.

Calculate the inflation rate between 2003 and 2005

The inflation rate between 2003 and 2005 for this simple economy also can be calculated from the price indexes above.



Thus, the rate of inflation between 2003 and 2005 is 100%. Prices in this simple economy doubled between 2003 and 2005.

Measurement of Inflation

Measurement of Inflation

Inflation is measured using a basket of goods. A basket of goods is a collection of products used to calculate a price index.

The table below lists the three most commonly used price indexes for measuring inflation in the United States. Each index uses a different basket of goods.

Price Index
Basket of Goods
Consumer Price Index (CPI)
Products purchased by a typical urban household.
Producer Price Index (PPI)
Products produced and sold by U.S. businesses, including goods and services that are used as inputs in the production of other products.



Everything in Gross Domestic Product. Unlike the CPI and PPI, the GDP deflator is not based on a fixed basket of goods.
Table 4. The baskets of goods associated with three price indices used to measure U.S. inflation.

Could you measure price changes by examining the amount of money spent on weekly trips to the grocery store? Probably not, because most people buy at least a few different items each trip to the store. If you bought the same items each time, however, then you would have some indication of what is happening to prices. The CPI and PPI use fixed baskets of goods. They calculate price changes over time to the same collection of items.

The base year is the year that is used as the comparison year when calculating an index. In the following examples, output in the base year is the basket of goods used to calculate the price indexes.

There are five steps to follow when using a price index to measure inflation.
Step 1. Choose the base year and determine the basket of goods.
Step 2. Find the price of each good in each year.
Step 3. Compute the cost of the basket of goods in each year.
Step 4. Compute the price index for each year.


Step 5. Use the price index to calculate the inflation rate.


Table 5. The five steps to follow when using a price index to measure inflation.

The Difference Between Nominal and Real Variables is the Inflation Rate

The Difference Between Nominal and Real Variables

The difference between nominal and real variables is the inflation rate. For example, the difference between the nominal interest rate and the real interest rate is the inflation rate. The nominal interest rate is the stated rate of return on a financial asset, such as the interest rate a bank pays on a certificate of deposit. The real interest rate is the nominal rate of return adjusted for inflation.

real interest rate = nominal interest rate - inflation rate

nominal interest rate = real interest rate + inflation rate

inflation rate = nominal interest rate - real interest rate


Table 2 provides examples of the relationship between the nominal interest rate, the real interest rate, and the inflation rate. The real interest rate is kept constant at 1%. This reflects the rate of return on a financial asset with low risk, such as a certificate of deposit.

nominal interest rate
real interest rate
inflation rate
1%
1%
0%
2%
1%
1%
3%
1%
2%
4%
1%
3%
5%
1%
4%
6%
1%
5%
7%
1%
6%
8%
1%
7%
9%
1%
8%
10%
1%
9%
11%
1%
10%
12%
1%
11%
...
...
...
51%
1%
50%
Table 2. The difference between nominal variables and real variables is the inflation rate.