LSP 120LSP 120

CPICPI

(Consumer Price Index)(Consumer Price Index)

Prices Have Changed!Prices Have Changed!

What do you remember?What do you remember?

Try the simple example on Try the simple example on http://facweb.cs.depaul.edu/LSP 120/cpi.htm

So is a $ today the same as a $ yesterday?So is a $ today the same as a $ yesterday?

Why do we care? What do you do when Why do we care? What do you do when someone tells you something cost $X twenty someone tells you something cost $X twenty years ago? What about your salary?years ago? What about your salary?

Index NumbersIndex Numbers

How is the buying power of $1.00 How is the buying power of $1.00 measured?measured?

How can we compare prices of items in How can we compare prices of items in different years?different years?

Use a price index or simply an Use a price index or simply an index index numbernumber

Index NumbersIndex Numbers

How do you create an index number?How do you create an index number? Working with a series of years and prices, Working with a series of years and prices,

choose a base period and set it to 100.choose a base period and set it to 100. Percentage increases (or decreases) from Percentage increases (or decreases) from

this base period are then calculated.this base period are then calculated. For example, consider the average price For example, consider the average price

of bread from 1980-1999:of bread from 1980-1999:

YearYear

Average Price of Average Price of White Bread per White Bread per pound (US City pound (US City

Average)Average)

19801980 $0.51$0.51

19811981 $0.53$0.53

19821982 $0.53$0.53

19831983 $0.54$0.54

19841984 $0.54$0.54

19851985 $0.55$0.55

19861986 $0.56$0.56

19871987 $0.55$0.55

19881988 $0.61$0.61

19891989 $0.67$0.67

19901990 $0.69$0.69

19911991 $0.71$0.71

19921992 $0.75$0.75

19931993 $0.75$0.75

19941994 $0.76$0.76

19951995 $0.79$0.79

19961996 $0.88$0.88

19971997 $0.87$0.87

19981998 $0.86$0.86

19991999 $0.89$0.89

YearYear Average Average Price of Price of BreadBread

White White Bread Bread Index Index (1980=100)(1980=100)

19801980 $0.51$0.51 100100

19811981 $0.53$0.53

19821982 $0.53$0.53

19831983 $0.54$0.54

Let’s make 1980 the base year.

We want the index to reflect the ratio of bread prices from a given yearto the price in 1980. Thus

Price in 1981 Index for 1981Price in 1980 = 100

or

0.53 = Index for 19810.51 100

Index for 1981 = (0.53 / 0.51) * 100 = 103.9 (What is this?? “Times more” changed to a percentage!)

Similarly, for 1982 we use the ratio back to 1980:

Price in 1982 Index for 1982Price in 1980 = 100

The complete index number table will look like:

YearYear

Average Price of Average Price of White Bread per White Bread per pound (US City pound (US City Average)Average)

White Bread White Bread Index Index (1980=100)(1980=100)

19801980 $0.51$0.51 100.0100.0

19811981 $0.53$0.53 103.2103.2

19821982 $0.53$0.53 104.6104.6

19831983 $0.54$0.54 106.5106.5

19841984 $0.54$0.54 106.4106.4

19851985 $0.55$0.55 108.7108.7

19861986 $0.56$0.56 111.0111.0

19871987 $0.55$0.55 107.6107.6

19881988 $0.61$0.61 120.5120.5

19891989 $0.67$0.67 130.8130.8

19901990 $0.69$0.69 136.5136.5

19911991 $0.71$0.71 139.5139.5

19921992 $0.75$0.75 147.4147.4

19931993 $0.75$0.75 147.8147.8

19941994 $0.76$0.76 149.5149.5

19951995 $0.79$0.79 155.5155.5

19961996 $0.88$0.88 172.1172.1

19971997 $0.87$0.87 171.4171.4

19981998 $0.86$0.86 169.1169.1

19991999 $0.89$0.89 174.2174.2

Index NumbersIndex Numbers

The neat thing about the index is how The neat thing about the index is how easy it is to see the percentage of easy it is to see the percentage of increase of a price from the base yearincrease of a price from the base year

How much more did bread cost in 1992 How much more did bread cost in 1992 than it did in 1980?than it did in 1980?

What is the percentage change from 1989 What is the percentage change from 1989 to 1999? (174.2-130.8)/130.8 = 33.1%to 1999? (174.2-130.8)/130.8 = 33.1%

Consumer Price IndexConsumer Price Index

An index is great for a particular item, but An index is great for a particular item, but what about inflation in general?what about inflation in general?

This is where the Consumer Price Index This is where the Consumer Price Index comes into play.comes into play.

The Bureau of Labor Statistics created an The Bureau of Labor Statistics created an imaginary “market basket” of goods that imaginary “market basket” of goods that an average family needsan average family needs

CategoryCategory WeightingWeighting

HousingHousing 39.6%39.6%

TransportationTransportation 17.6%17.6%

FoodFood 16.3%16.3%

EntertainmentEntertainment 6.1%6.1%

Medical CareMedical Care 5.6%5.6%

Education and Communication Education and Communication 5.5%5.5%

Apparel and UpkeepApparel and Upkeep 4.9%4.9%

OtherOther 4.3%4.3%

Consumer Price IndexConsumer Price Index

The table on the next slide shows the The table on the next slide shows the official CPI since 1982 (it actually goes official CPI since 1982 (it actually goes back to 1912).back to 1912).

Note that the base price was not taken Note that the base price was not taken from one year but taken from the average from one year but taken from the average of three years: 1982 – 1984.of three years: 1982 – 1984.

Year CPI (1982-1984 = 100)1982 96.51983 99.61984 103.91985 107.61986 109.61987 113.61988 118.31989 124.01990 130.71991 136.21992 140.31993 144.51994 148.21995 152.41996 156.91997 160.51998 163.0

Think of the CPI as the amount the average consumer would have to spend in a given year to buy the same basic goods and services thatone would have to pay $100 for in the base period.

How Do We Use the CPI?How Do We Use the CPI?

In 1990, gasoline cost $1.16 per gallon (on In 1990, gasoline cost $1.16 per gallon (on average). In 1997, the average price was average). In 1997, the average price was $1.23. Did the cost of gasoline go up or $1.23. Did the cost of gasoline go up or go down?go down?

$1.16 and $1.23 are called $1.16 and $1.23 are called current current prices. prices. According to these current prices, it looks According to these current prices, it looks like gas got more expensive. Is this like gas got more expensive. Is this accurate?accurate?

Let’s compare the prices taking into Let’s compare the prices taking into account the changing value of moneyaccount the changing value of money

We wish to know:

$1.16 in 1990 dollars is equivalent to x in 1997 dollars?

160.50 (1997 CPI) x (1997 dollars)130.70 (1990 CPI) = 1.16 (1990 dollars)

x = (160.50 / 130.70) * 1.16x = 1.42

So when Americans paid $1.16 per gallon for gasoline in 1990, it was equivalent to someone paying $1.42 in 1997,which is considerably more than what they were actuallypaying in 1997 ($1.23). The $1.42 value is what we call constant dollars.

The price of gasoline was cheaper in 1997 than in 1990!

Or look at it this way:

The ratio of 160.50 130.70

equals 1.228. This is how many times more one 1990 dollar wasworth in 1997.

So multiply the 1990 price of $1.16 by this ratio (1.228) and youwill get the value $1.42.

Let’s Try Another OneLet’s Try Another One

A 1966 Schwinn 5-Speed Fastback bicycle A 1966 Schwinn 5-Speed Fastback bicycle cost $69.95cost $69.95

What would that cost today?What would that cost today?

Let’s Try Another OneLet’s Try Another One

Divide 2010 CPI by 1966 CPI and multiply Divide 2010 CPI by 1966 CPI and multiply by $69.95by $69.95

(218.1 / 32.4) * 69.95 = $470.87(218.1 / 32.4) * 69.95 = $470.87

More Uses of CPIMore Uses of CPI

You can use the CPI You can use the CPI to convert an entire to convert an entire series of prices to series of prices to constant dollarsconstant dollars

Consider the price of Consider the price of electricity from 1990 electricity from 1990 to 1998:to 1998:

YearYear Avg CostAvg Cost

ElectricityElectricity

Per kWhPer kWh

19901990 $0.084$0.084

19911991 $0.087$0.087

19921992 $0.088$0.088

19931993 $0.092$0.092

19941994 $0.092$0.092

19951995 $0.094$0.094

19961996 $0.094$0.094

19971997 $0.094$0.094

19981998 $0.087$0.087

More Uses of CPIMore Uses of CPI

In graphical form, the data looks like:In graphical form, the data looks like:

InflationInflation

Inflation is defined as the percentage Inflation is defined as the percentage increase in the CPI for a given yearincrease in the CPI for a given year

For example, the CPI in 1997 was 160.5; For example, the CPI in 1997 was 160.5; in 1998 it was 163.0.in 1998 it was 163.0.

The inflation rate for 1998 wasThe inflation rate for 1998 was(163.0 – 160.5)(163.0 – 160.5)

160.5160.5

= 1.6%= 1.6%

What is Your Salary History?What is Your Salary History?

Salary in Constant DollarsSalary in Constant Dollars

Years

Salary

Are you gaining income, losing income, or staying even?