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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The Christmas Price Index measures inflation using the items in the song "The Twelve Days of Christmas."

In the November 20, 2009 article "'12 Days of Christmas' items' cost would top $87K," Associated Press writer Dan Nephin reports the 2009 update of the Christmas Price Index which measures inflation using the items mentioned in the famous song as the basket of goods.

PITTSBURGH – Making one's true love happy will cost a whopping $87,403 this year, a minuscule increase from last year, according to the latest cost analysis of the items in the carol "The Twelve Days of Christmas."

That's the grand total for the single partridge in a pear tree to the 12 drummers drumming, purchased repeatedly as the song suggests, according to the annual "Christmas Price Index" compiled by PNC Wealth Management. The price is up a mere $794, or less than 1 percent, from $86,609 last year.

The cost of buying each item just once is increasing this year to $21,466, up 1.8 percent from last year's $21,081.

Jim Dunigan, managing executive of investment for PNC Wealth Management, which has been calculating the cost of Christmas since 1984, attributed the modest increase to lower energy costs and fewer wage increases.

It's the smallest increase since 2002, when the cost actually decreased, according to PNC.

The main driver behind the higher cost is that the price of gold has increased 43 percent, bringing the five gold rings up $150 to $500.

Although wage increases were modest, nine ladies dancing, at $5,473 per performance, is the costliest item, surpassing that of any of the material goods.

The most expensive goods are the seven swans a-swimming at $5,250, but their cost decreased 6.3 percent from last year's $5,600. Dunigan said their cost tends to be the most volatile because of supply and demand; they were up 33 percent last year over 2007.

Costs for the 10 lords a-leaping ($4,414 per performance), 11 pipers piping ($2,285 per performance) and 12 drummers drumming ($2,475 per performance) remained the same as last year. Dunigan says that reflects the labor market in which the unemployment rate rose to near 10 percent after sitting below 5 percent for much of the decade.

And for those who would shop online, a word of caution.

PNC says you'll pay $31,435, which is down from last year's online price, but still about $10,000 more than in the traditional index.

"In general, Internet prices are higher than their non-Internet counterparts because of shipping costs for birds and the convenience factor of shopping online," Dunigan said.

PNC Financial Services Group Inc. checks jewelry stores, dance companies, pet stores and other sources to compile the list. While it is done humorously, PNC said its index mirrors real economic trends.

Besides putting out the list for fun, PNC makes it available to teachers across the country to teach economic trends.

While it's unlikely anyone would buy the items, Dunigan said one item is likely to please.

"We don't necessarily suggest picking just one, but it's hard to believe that gold rings wouldn't lead the list on a year-to-year basis," Dunigan said.
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On The Net:
PNC Christmas Price Index: http://www.pncchristmaspriceindex.com

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

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.