Consumer Price Index (CPI)

Mariner Stoddard Eccles

The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer.

The Bureau of Labor Statistics reports the CPI each month.

It is used to monitor changes in the cost of living over time.

When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.

Fix the Basket: Determine what prices are most important to the typical consumer.

The Bureau of Labor Statistics (BLS) identifies a market basket of goods and services the typical consumer buys.

Find the Prices: Find the prices of each of the goods and services in the basket for each point in time.

Choose a Base Year and Compute the Index:

Designate one year as the base year, making it the benchmark against which other years are compared.

Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100.

Use the following formula to compute the calculation:19__ Price = 20__ Price x (19__ CPI / 20__ CPI*)

Ex. 1950 Price = 2013 Price x (1950 CPI / 2013 CPI*)1950 Price = $7.00 x (24.1 / 233.9)

1950 Price = $7.00 x (.1030)1950 Price = $.72

In 1931, the New York Yankees paid Babe Ruth an annual salary of $80,000.

In 2010, the New York Yankees paid Alex Rodriguez an annual salary of $33 million.

But then again, in 1931 an ice cream cone cost a nickel and a movie ticket cost a quarter. More generally, the cost of living has risen greatly since then.

Year CPI

1933 12.9

2010 218.1

2010 Price = 1933 Price x (2010 CPI / 1933 CPI)

2010 Price = $80,000 x (________ / __________)

2010 Price = $80,000 x ______________

2010 Price = $

16.9069

218.1 12.9

1,352,558

Year Median Household Income

CPI

1980 $18,000 82.4

2007 $45,000 207.3

2007 Price = 1980 Price (2007 CPI/1980 CPI)

2007 Price = $________ (_______/________)

2007 Price = $

18,000 207.3 82.4

45,283

How does this compare to the median income of 2007?

Inflation refers to a situation in which the economy’s overall price level is rising.

The inflation rate is the percentage change in the price level from the previous period.

Compute the inflation rate: The inflation rate is calculated as

follows: period.Inflation Rate in Year 2 =CPI in Year 2 - CPI in Year 1

CPI in Year 1X 100

Inflation Rate in Year 2 =CPI in Year 2 - CPI in Year 1

CPI in Year 1

Ex. [2007] 207.3 – [1980] 82.4[1980] 82.4

= %

X 100

X 100

X 100124.9

82.4151.6