Consumer Price Index News Release

------------------------------------------------------------------
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.
---------------------------------------------------------------------------

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.

-------------------------------------------------------------------------
News releases archives:
http://www.bls.gov/schedule/archives/all_nr.htm
To subscribe or unsubscribe to BLS news releases
please visit http://www.bls.gov/bls/list.htm
-------------------------------------------------------------------------

Consumer Price Index news release

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.

On a seasonally adjusted basis, the CPI-U increased 0.3 percent in October after rising 0.2 percent in September.
The index for all items less food and energy increased 0.2 percent in October, the same increase as in September.

News releases archives:
http://www.bls.gov/schedule/archives/all_nr.htm

Why it doesn't feel like prices are falling

In the October 26, 2009 CNNMoney article "Consumers have trouble finding falling prices," Chris Isidore asks "the government says we're paying less for our everyday needs — so where are the savings?"

The government says consumers are paying less for their everyday needs compared to a year ago. But if it feels like your dollar is not going as far as it used to, you're not alone.

The Consumer Price Index is down 1.3% from a year ago, meaning that the typical market basket of goods and services should be costing you that much less.

But there are a number of factors, some having to do with how CPI is calculated by the Labor Department's Bureau of Labor Statistics (BLS) and some having to do with economic behavior, which can make those savings seem like a mirage.

Here are some of the reasons why your wallet isn't feeling any fatter.

Fuel

Nothing has driven down overall prices more in the past year than the drop in energy prices. Gasoline prices are down nearly 30% in the past 12 months, but if you strip out falling energy prices, the overall CPI is up 1.2%.

But even though gas may be cheaper than a year ago, it still probably feels like prices are going up. That's because gas prices are up 29% in the last six months.

That obviously can cause a squeeze on household budgets, especially as a weak labor market has resulted in tiny rises in the average weekly paycheck.

Health care

Health care is a significant part of consumers' expenditures, topping money spent on gasoline and trailing only housing and food. But calculating the cost of health care is perhaps the trickiest part of CPI, partly because insurance distorts how consumers pay for medical expenses.

According to the Labor Department, overall health care costs were up 4.2% in 2008. For those calculations, the BLS surveyed consumers, medical providers and insurers and tries to come up with a specific cost of medical care.

One reason that healthcare prices appear to have only increased slightly is because if something is judged to be an improved service, such as a new drug, the BLS does not actually consider the higher costs to be a price increase.

That's because the BLS assumes consumers are getting more for their money. But new drugs and treatments are common in the medical industry -- and insurers often charge consumers more for them.

But other calculations show health care expenses, including insurance and other out-of-pocket costs, are rising faster. For example, consumers spent 7% more on health insurance in 2008 than they did a year earlier, according to a separate government reading conducted by the Census Bureau.

And surveys from the Kaiser Family foundation found rises in deductibles, co-payments and other out-of-pocket medical expenses not being captured in either the Census figure or the CPI calculations.

Blame it on Washington

Some government payments, such as Social Security benefits, are pegged to CPI. The current year-over-year decline in CPI means that those benefits won't go up next year. That will be the first time since the cost-of-living adjustment was put in place in 1975 that retirees won't get an increase in Social Security.

Tax brackets and deductions also are pegged to CPI, meaning higher tax bills for many people in 2010 than they would have had to pay if prices were higher.

In the 1990's, then Federal Reserve Chairman Alan Greenspan argued that CPI was higher than justified by economic reality and costing the government money it couldn't afford. As a result, changes in the calculation of CPI were made.

One of the most significant changes was that the government started to assume that if the price of a good rose more than the price of an alternative product, consumers would shift more of their purchases to the lower priced option, limiting the price increase. But even if consumers behave that way, they would still be aware of the higher prices of the goods they can no longer afford.

Because the federal government benefits from lower inflation readings, critics accuse policymakers of intentionally calculating CPI much lower than it should be. Even the BLS admits CPI would be between 0.2 and 0.3 percentage points higher today if the old methods had been used.

Perception

Finally, it's very likely that consumers pay more attention to prices that are going up than prices that are going down.

Behavioral economists say people are very sensitive to any financial losses, meaning they will make far more effort to avoid losing or spending money than they will to make the same amount of money.

Robert Frank, a leading behavioral economist at Cornell University, said this well-documented theory is the reason that higher prices make so much more of an impression than the lower prices that might balance it out.

"Price declines don't register with the same intensity as price increases," he said. "Even if they notice it, it's just not going to arouse them in the same way a price increase will. People like to complain."

The fact that overall price decreases aren't keeping up with the record drop in household wealth over the past few years also makes consumers that much more concerned about prices that are rising.

Frank added that with wages flat and credit still tight, products that might have been considered affordable in the past may now be out of reach for consumers -- even if prices are only up slightly.

"Any struggle to make their budgets fit just exacerbates any injuries you feel from the prices that do increase," he said.

No Increase for Social Security

In the September 24, 2009 SmartMoney article "Social Security's New Math," Lisa Scherzer reports that Social Security payments in 2010 will not have the usual cost of living increase:

Come January 2010, seniors may do a double take after seeing their Social Security checks. The two to three percentage-point increase in benefits they usually get each year won’t be there.

That’s because, for the first time in three decades, there likely won’t be a cost of living adjustment (COLA). “People notice when their checks don’t change, says Bruce Meyer, a professor at the University of Chicago’s Harris School of Public Policy.

In the context of degraded home prices and investment losses, the change will feel like a loss to many seniors, even though benefit amounts for 2010 won’t shrink. Social Security benefits are adjusted every year to keep up with inflation, so that seniors can retain their purchasing power. Adjustments are based on the consumer price index for urban wage earners (CPI-W) between the third quarter (July-September) of the previous year and the third quarter of the current year. The 2010 COLA will be based on a period marked by sharp drops in prices and deflation.

Democratic lawmakers are trying to lessen the perceived pain. Rep. Carolyn McCarthy (D., N.Y.) introduced legislation last week that would provide a one-time $150 payment for Social Security beneficiaries to compensate for the lack of an adjustment.

Still, anxious seniors should keep in mind that they will actually come out ahead of inflation. “In a sense, older people are going to do fine because the cost of living is down and they’re not going to have their benefits cut,” says John Laitner, the director of the Retirement Research Center at the University of Michigan.

Here is the good and bad about a flat COLA.

Reasons to Fret

Next COLA increase will be in 2012: Not only won’t seniors receive an adjustment for 2010, but the Social Security and Medicare Trustees project no cost of living adjustment for 2011 and only a modest 1.4% increase in 2012. That means seniors won’t see higher payments until 2012. Of course, the Trustees report is a forecast, and next year’s report, which will take into account new data, could be revised.

Rising health-care costs: Older people get hit more by rising health-care costs than younger people do, says Pamela Herd, an associate professor of public affairs and sociology at the University of Wisconsin. That’s because seniors are disproportionate users of the health-care system and pay about 20% higher out-of-pocket health care costs than does the rest of the population. So while inflation hasn’t really been a concern, health-care costs are increasingly eating into seniors’ Social Security checks.

Higher Medicare premiums for some: Medicare Part B premiums have increased almost every year to keep pace with the growth in Part B expenditures. (Part B insurance helps pay for some services not covered by Part A, generally on an outpatient basis.)

For most of the 42 million Part B beneficiaries, the amount of the monthly Social Security COLA each year has been more than enough to offset the increase in the Part B premium – resulting in net increases in benefits, according to the Kaiser Family Foundation. But next year and in 2011, about 8% of Part B beneficiaries will be subject to higher premiums, sums that will be deducted from their Social Security payments. According to Kaiser, they'll pay $104.20 a month in 2010 and $120.20 in 2011, up from $96.40 this year.

On the Upside

The benefit bump: Social Security beneficiaries got an atypically large 5.8% increase in benefits in 2009 – the biggest in more than 25 years. That outsize increase was primarily because of 2008’s spike in oil prices, says Laitner. But since then the CPI increase was lost as energy prices fell. It was an excessively high COLA that raised the purchasing power of seniors’ benefits, actually putting them “ahead where they should be,” says Andrew Biggs, a resident scholar at the American Enterprise Institute, a nonprofit public policy group.

Seniors are better off than most: While the poverty rate increased from 2007 to 2008 and median household income fell, both indicators remained statistically unchanged for people 65 and older, according to last week’s Census report. “So the official data say that group is doing quite well – and all those numbers predated the 5.8% increase in Social Security benefits” this year, says Meyer of the University of Chicago.

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.

Millions face shrinking Social Security payments

According to the August 23, 2009 article "Millions face shrinking Social Security payments," Associated Press writer Stephen Ohlemacher says:

WASHINGTON – Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise. The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.

By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.

"I will promise you, they count on that COLA," said Barbara Kennelly, a former Democratic congresswoman from Connecticut who now heads the National Committee to Preserve Social Security and Medicare. "To some people, it might not be a big deal. But to seniors, especially with their health care costs, it is a big deal."

Cost of living adjustments are pegged to inflation, which has been negative this year, largely because energy prices are below 2008 levels.

Advocates say older people still face higher prices because they spend a disproportionate amount of their income on health care, where costs rise faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios just as they are relying on those assets for income.

"For many elderly, they don't feel that inflation is low because their expenses are still going up," said David Certner, legislative policy director for AARP. "Anyone who has savings and investments has seen some serious losses."

About 50 million retired and disabled Americans receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. All beneficiaries received a 5.8 percent increase in January, the largest since 1982.

More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration.

Millions of people with Medicare Part B coverage for doctors' visits also have their premiums deducted from Social Security payments. Part B premiums are expected to rise as well. But under the law, the increase cannot be larger than the increase in Social Security benefits for most recipients.

There is no such hold-harmless provision for drug premiums.

Kennelly's group wants Congress to increase Social Security benefits next year, even though the formula doesn't call for it. She would like to see either a 1 percent increase in monthly payments or a one-time payment of $150.

The cost of a one-time payment, a little less than $8 billion, could be covered by increasing the amount of income subjected to Social Security taxes, Kennelly said. Workers only pay Social Security taxes on the first $106,800 of income, a limit that rises each year with the average national wage.

But the limit only increases if monthly benefits increase.

Critics argue that Social Security recipients shouldn't get an increase when inflation is negative. They note that recipients got a big increase in January — after energy prices had started to fall. They also note that Social Security recipients received one-time $250 payments in the spring as part of the government's economic stimulus package.

Consumer prices are down from 2008 levels, giving Social Security recipients more purchasing power, even if their benefits stay the same, said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank.

"Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt," Biggs said. "Congress has to be able to tell people they are not getting everything they want."

Social Security is also facing long-term financial problems. The retirement program is projected to start paying out more money than it receives in 2016. Without changes, the retirement fund will be depleted in 2037, according to the Social Security trustees' annual report this year.

President Barack Obama has said he would like tackle Social Security next year, after Congress finishes work on health care, climate change and new financial regulations.

Lawmakers are preoccupied by health care, making it difficult to address other tough issues. Advocates for older people hope their efforts will get a boost in October, when the Social Security Administration officially announces that there will not be an increase in benefits next year.

"I think a lot of seniors do not know what's coming down the pike, and I believe that when they hear that, they're going to be upset," said Sen. Bernie Sanders, an independent from Vermont who is working on a proposal for one-time payments for Social Security recipients.

"It is my view that seniors are going to need help this year, and it would not be acceptable for Congress to simply turn its back," he said.
___
On the Net:
Social Security Administration: http://www.ssa.gov/
National Committee to Preserve Social Security and Medicare: http://www.ncpssm.org

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.)

The Most Important Concepts about the Macroeconomic Policy Goal of Low Inflation

· Inflation imposes costs on society that generally result in reduced economic growth and lower present and future standards of living.

· Keeping inflation low is the primary macroeconomic policy goal in the most developed economies of the world.

· Inflation can be very hard to eliminate because expectations of future price increases contribute to continued inflation.

· Inflation is most commonly measured in the U.S. using the consumer price index (CPI). The measurement of inflation using the consumer price index (CPI) exaggerates the actual level of price increases in an economy. Consequently, even when the prices of consumer products are relatively stable, the CPI suggests there is 1-2% inflation in the economy. Thus, the macroeconomic policy goal is low inflation, rather than no inflation.

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 the Consumer Price Index to Measure Inflation

The U.S. consumer price index (CPI) for the years 1990 to 2000 is listed below:
1990 - 130.7
1991 - 136.2
1992 - 140.3
1993 - 144.5
1994 - 148.2
1995 - 152.4
1996 - 156.9
1997 - 160.5
1998 - 163.0
1999 - 166.6
2000 - 172.2

To calculate the inflation rate between two years, divide the difference between the CPI in the two years by the value of the CPI in the earlier year and multiply the result by 100.

Inflation Rate = [(CPI in later year - CPI in earlier year) / (CPI in earlier year)] x 100

For example, the inflation rate between 1999 and 2000 was:

[(CPI in 2000 - CPI in 1999) / (CPI in 1999)] x 100 = [(172.2 - 166.6) / 166.6] x 100 = [5.6 / 166.6] x 100 = 3.4%