Consumer Price Index CPI
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Transcript of Consumer Price Index CPI
Consumer Price IndexCPI
Week 7LSP 120Joanna Deszcz
PricesName some prices that have
changed in your lifetime◦Prices that have increased◦Prices that have decreased
An Example◦Guess the Price
Percentage Increase 1962-1998
Item Percentage Increase in Price
Hershey bar 1180%New York Times 1100%First class postage 700%Gasoline (gallon) 284%Hamburger (McDonald's double) 861%Chevrolet (full size) 790%Refrigerator freezer 60%
How does the quality of each item compare from 1962 to 1998?
What have we learned so far?Prices can and do change
dramatically in relatively short periods◦Price from the past can become
virtually meaninglessPrices of items do not go up
consistently◦Some go up faster than others
Items change over time ◦Becomes difficult to compare prices
because the items are not really comparable
InflationThe general increase of the price
of goods over timeNo obvious quality improvementOkay as long a our income
increases at same rate or higherIf not, not as well off as we thinkAlso important to financial
planning◦$100 today will not buy as much in
20 years
Inflations Effect on $1.00
Some questionsHow do we compare prices of
today with those of the past?How do we measure inflation?
Consumer Price IndexWay to compare prices in
different yearsEconomists choose a “bundle” or
“basket” of goods in varying proportions
Components of the CPI(U) Housing 41.4%Transportation 17.8%Food 16.2%Energy 8.2%Medical Care 6.4%Apparel and Upkeep 6.1%Other 3.9%
CPI ContinuedThe cost of the bundle is
assigned an index numberThe following year the cost of the
same bundle is determinedCPI for that year = new cost of
bundle
Official CPI 1990-2008Year
CPI1982-84=100
1990 130.71991 136.21992 140.31993 144.51994 148.21995 152.41996 156.91997 160.51998 163.01999 166.62000 172.22001 177.12002 179.92003 184.02004 188.92005 195.32006 201.62007 207.32008 215.3
How to read the table◦ Used to compare
prices of any two years
◦ Example: same goods that cost $130.70 in 1990 would cost $172.20 in 2000
◦ So $130.70 in 1990 = $172.20 in 2000
Initial Index value = 100 and represents average CPI of 1982-84
Relationship Between FactorsCan calculate how many times
more the prices of goods were in one year than in a
Calculate the ratio of the CPI values
So, goods in 2000 cost 1.302 times more than in 1990 (on average)
2000 CPI = 170.2 = 1.302 1990 CPI 130.7
Converting to Constant DollarsComparing amounts from 2 different
yearsCan convert any money related variables
◦Prices, wages, salariesCurrent prices for each year are called
nominalCompare prices taking changing value of
money into accountConvert one price to same year as other
◦Usually convert forward to more recent year
ExampleThe price of gasoline in 1990 was
$1.16 per gallon on average. In 1997, it averaged $1.23. Was gasoline more expensive or less expensive in 1997? ◦1990 $130.70 equivalent to $160.50 in
1997◦1997 CPI = 160.5 = 1.23
1990 CPI 130.7 So $1.00 in 1990 = $1.23 in 1997
◦Multiply 1990 value by 1.23 (1.16 * 1.23) So $1.16 in 1990 = $1.42 in 1997
Another ExampleYour instructor said she made
$22,000 a year at her first job out of college in 1993. That doesn't sound like a lot of money to us today, but we must consider that everything was less expensive in 1993.
What is that salary worth in today's money (in 2008)?
Compare Prices in Consecutive Years
Convert entire series of prices to constant dollars
Use Excel
Electricity Prices1986 - 1997
Electricity Prices (US city average, per KWH)
Year Price
1986 $0.077
1987 $0.079
1988 $0.080
1989 $0.082
1990 $0.084
1991 $0.087
1992 $0.088
1993 $0.092
1994 $0.092
1995 $0.094
1996 $0.094
1997 $0.094
As a Graph…
Is this a realistic depiction of the price of electricity?
Huh?Did price of electricity increase
really?Value of dollar deceased each
yearNominal cost increasedWhat about constant dollars?Convert 1986 values to 1997
dollars tp find out
Here’s how…Year Price CPI1986 $0.08 109.61987 $0.08 113.61988 $0.08 118.31989 $0.08 1241990 $0.08 130.71991 $0.09 136.21992 $0.09 140.31993 $0.09 144.51994 $0.09 148.21995 $0.09 152.41996 $0.09 156.91997 $0.09 160.5
Add a column with CPI for each year◦ CPI.xls
Then…Calculate the
1997 equivalent value for each price
1997 CPI value will remain constant in each equation
Make it an absolute reference by pressing F4 on the keyboard
Fill to the bottom
The new Graph
1984 1986 1988 1990 1992 1994 1996 1998$0.080
$0.085
$0.090
$0.095
$0.100
$0.105
$0.110
$0.115
1997 Constant $ Value
Calculating Inflation RateInflation rate is defined as
◦the percentage change in the CPIs from the previous year to the next.
◦Inflation Rate in 2008 was 2008 CPI – 2007 CPI
2007 CPI 215.3-207.3 = .0386 or 3.86%
207.3