Measuring Changes in Prices

Inflation, Recession and the Consumer Price Index

Inflation is…

Inflation is a rise in the general level of prices.

Inflation

It is an increase in average prices that lasts at least a few months.

Often, a one month increase in prices is referred to as inflation, but a longer-term upward trend of prices is a more accurate definition.

Deflation

Just the opposite of inflation, deflation is generally defined as a continual decrease in the overall level of prices. It is a decrease in average prices that lasts at least a few months.

Types of Inflation…

Demand Pull Inflation

Cost Push Inflation-

COLA - Cost of Living Adjustment

Creeping Inflation

Hyperinflation – 100%+

http://www.youtube.com/watch?v=QmZ36uABULY

The CPI…

Each month, the U.S. Bureau of Labor Statistics (BLS) releases an estimate of the level of the consumer price index (CPI) and the rate of inflation in the United States for the previous month.

The CPI measures changes in prices over time. By selecting an appropriate base year and setting the index level for that time period at 100, the CPI compares one month's price index level with the base year or any other time period.

The current standard reference base period is the average of the period from 1982 to 1984.

Base Year (82-84 avg.)= 100Current, January 2014, CPI =

233.916So…on the average…prices have

increased 2.33 times since 1982-84.Something that cost $1.00 in ‘83

would cost $2.33 in 2014, if it followed inflation.

So…on the average…prices have increased 2.33 times since 1982-84.

Something that cost $1.00 in ‘83 would cost $2.33 in 2014, if it followed inflation.

Or..if you made $10,000 in 1983, you would need $23,392 in 2014 to be have the same purchasing power as in 1983.

Taking out food and energy-- the “Core CPI”– shows slightly less inflation.

Core CPI, January, 2014 = ~230

They track prices of a marketbasket

The marketbasket of goods and services includes items that the BLS believes the typical consumer would purchase monthly.

CPI uses a “weighted average”-Some categories are count more than others

The BLS releases the CPI Monthly

http://www.bls.gov/news.release/pdf/cpi.pdf

Note how some of the categories have gone up and some have gone down.

Does this match your own experience with prices?

Some price increases show up in strange ways…

http://usahitman.com/hidden-inflation-food-packaging/

http://www.dailyfinance.com/2011/04/04/u-s-companies-shrink-packages-as-food-prices-rise/

http://www.marketplace.org/topics/life/less-product-same-price

An interesting way to look at things…

http://www.minneapolisfed.org/mea/conferences/2010program/fitzgerald.pdf

Go in to slide 35 and see what changes have taken place that would not be caught in the Consumer Price Index.

Now a little song…

http://www.youtube.com/watch?v=2fq2ga4HkGY