Presentation on theme: "The Consumer Price Index: A User’s Guide"— Presentation transcript:
1 The Consumer Price Index: A User’s Guide Kara MarkleyErin DelaneyMid-Atlantic Information OfficeMay 19, 2014
2 BLS dataThe U.S. Bureau of Labor Statistics (BLS) collects, analyzes and publishes data on our economy and our society.Inflation, prices, and spendingEmployment and unemploymentPay and benefitsWorkplace injuries and fatalitiesProductivity
3 BLS stakeholders BLS data is widely used by: Government policy makers MediaEmployeesManagersBusiness ownersConsumersStudentsJob seekers
4 Presentation overview What is the CPI?Uses of the CPI:Contract escalationOther common CPI calculationsWebsite tutorial
5 Consumer Price Index: The buyer’s perspective The CPI measures change over time in the prices paid by urban consumers for a representative basket of goods and servicesThe CPI is the most widely used measure of price change
6 CPI population groupsAll Urban Consumers (CPI-U): about 88% of the total U.S. populationUrban Wage Earners and Clerical Workers (CPI-W): a subset of the CPI-U population; about 29% of the U.S. total
7 Index: The “I” in “CPI”Index numbers show change over time from a base period, which is defined as 100.0For example, an increase of 7.0 percent from the base period is shown as 107.0Index numbers are not dollar valuesIndex value changes are relative and depend on the base periodPercent changes must be used to interpret index movements
8 The CPI market basketDeveloped from detailed information on actual purchases by families and individualsBased on Consumer Expenditure SurveyAbout 7,000 families from around the country participated each year:Quarterly interviews about significant purchasesDiaries listing every purchase during 2-week periods
9 CPI major expenditure categories Food and BeveragesHousingApparelTransportationEducation & CommunicationOther Goods& ServicesMedical CareRecreation
10 CPI relative importance Expenditure weight of a CPI component as a percent of all itemsReflect actual distributions based on consumer expendituresBased on weights as of December 2013Revised every two years to reflect changes in the economy such as:IncomeClimate & weather patternsFamily sizeGoods & services in the marketplace
11 Relative importance of CPI-U components, December 2013
12 Relative importance of CPI-U index groups, December 2013
13 Also included in the CPI: Various government-charged user fees:Water and sewerage chargesAuto registration feesVehicle tollsTaxes directly associated with the prices of specific goods and services:Sales taxesExcise taxes
14 Excluded from the CPI:Taxes not directly associated with the purchase of consumer goods and services:Income taxesSocial Security taxesInvestment or savings items:Stocks & bondsReal estateLife insurance
15 Publication Publication CPI-U All Items U.S. City Average for all urban consumers is the monthly headline figure reported in the news.3 indexes are highlighted:FoodEnergyAll items less food and energy: often referred to as the “core” inflation index, removes the more volatile food and energy price changesAlso published each month are CPI-W, CPI-E, and Chained CPI-U.Once prices have been collected and averaged together, the end result is the monthly inflation figure you hear reported in the news. If you pick up one of the monthly news releases that we produce, you’ll see that 3 other indexes are highlighted, namely food, energy, all items minus food and energy. The latter index, is one that generates a lot of misconceptions, namely that BLS excludes food and energy from the headline inflation figure. That couldn’t be farther from the truth. All items less food and energy is sometimes used by economists and policymakers to determine how much of an impact food and energy are having on the cost of other consumer items plus they tend to be volatile so if you’ve looking at a chart of inflation to get a sense of the underlying trend removing food and energy can be useful.
16 What is the C-CPI-U?The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) is a variation of the CPI-U that matches changing purchasing habits with prices recorded for items each month.First produced in 2002, data back to January 2000 (December 1999=100).Differs from the CPI-U in both weighting and formulaReflects the effect of substitution that consumers make across item categories in response to changes in relative pricesThe key strength of the C-CPI-U is that it is a closer approximation of a true cost-of-living index in that it reflects changes in consumer spending patterns across CPI item categories every month.
17 Uses of CPI data Economic Indicator Contract Escalation The CPI is an indicator of the effectiveness of government policy. Business executives, labor leaders and other private citizens use the index as a guide in making economic decisions.The CPI and its components are used to adjust other economic series for price change and to translate these series into inflation-free dollars.2M+ workers are covered by collective bargaining agreements which tie wages to CPI. Affected as a result of statutory action: Social Security beneficiaries, military & Federal Civil Service retirees and survivors, and food stamp recipients. Also affects the cost of lunches for children.The most widely used escalation applications are in private sector collective bargaining agreements, rental contracts, insurance policies with automatic inflation protection, and alimony and child support payments.Economic IndicatorDeflator of Other Economic DataAdjusting Income PaymentsContract Escalation
18 CPI as a basis for contract escalation Contractual agreements often use the CPI to escalate or adjust paymentsPrivate sector collective bargaining agreementsRental contractsInsurance policies with inflation protectionsAlimony and child support payments
19 Percent change formula CPIc − CPIp x 100 CPIpCPIc = CPI for current periodCPIp = CPI for previous period
20 Percent change example Now, calculate the 12-month percent change from March 2013 to March 2014.
21 Calculating percent change Computation of percent change:CPIcLess CPIpEquals index point change 2.412Divided by CPIp /EqualsResults multiplied by X 100Equals percent change 1.6
23 Unpublished percent change Now try something that’s not in the database: Calculate the percent change from March 2011 to March 2014.
24 Percent change, March 2011–March 2014 Check your work− xPercent change, March 2011–March 2014= 5.7%
25 Get out your calculator… Escalation exercise: Office Space
26 Exercise: Office Space A software business, Initech, leases some office space in a privately owned building next door to Initech. Currently, Initech is renting the space for $5,000/mo. It is your job to make the budget entry for this leased space for the next fiscal year. The lease states that the rent will be adjusted each year on September 1, by the 12-month percent increase in the CPI-U, Washington-Baltimore, All Items, Not Seasonally Adjusted, for July of that same year and shall not exceed 3%. Calculate what the new monthly rent will be when the lease is renewed on September 1, 2013.
27 Exercise: Office Space $5,000 x .019 = $95 increase for September 2013September 2013 rent = $5,000 + $95 = $5,095
28 CPI guidelines for escalation General guidelines:DEFINE clearly the base payment to be escalatedIDENTIFY precisely which CPI index series will be used to escalate the base paymentSPECIFY a reference period from which changes in the CPI will be measured
29 CPI guidelines for escalation General guidelines (continued):STATE the frequency of adjustmentDETERMINE the formula for the adjustment calculationPROVIDE a built-in method for handling a major CPI revision or change in the CPI index base period
30 Get out your pen and imagination… Write your own contract exercise: My Favorite Things
31 Exercise: My Favorite Things Take a moment to think about your favorite things… what’s something you’d never want to run out of?Using the guidelines that we just reviewed, write your own escalation clause to be used in a contract for the ongoing purchase of one of your favorite things, so you won’t have to be without it. You can refer to the guidelines on slides 26 and 27 of the presentation to help you.When you’re done, look back over the clause you’ve written. Is it clear and easy to follow? Does it leave anything open for interpretation or dispute? How is it similar to the one you use at work, and how is it different?
32 Other calculations and special circumstances* Annual averagePurchasing powerConstant dollarsConversion to other base periodsDiscontinued indexes and publication changes*More information on these concepts and others can be found at:
33 Annual average BLS publishes the average CPI for the calendar year Sum of the 12 monthly data points, divided by 12
34 Constant dollarsUse the CPI to “deflate” current (nominal) dollars into constant (real) dollarsCPIr / CPIn x Value (U.S. annual averages)Consider the following salary progression:Nominal Real (2002 dollars)2002: (179.9/179.9) x $40,000 = $40,0002007: (179.9/207.3) x $45,000 = $39,0522012: (179.9/229.6) x $50,000 = $39,177
35 Purchasing powerWhen prices rise, the same dollar buys less. Use the CPI to determine how much less.CPId / CPIp x 100Example: What was the purchasing power of a dollar in 2012? (U.S. annual averages)179.9 / x 100 = 78.4In 2012, a 2002 dollar buys 78.4% of its original value, or 78.4 centsCPId = CPI for the year of your “dollar”CPIp = CPI for the “purchasing power” year
36 Conversion to other base periods Some contracts may use a reference base that is no longer publishedContact the BLS for the specific rebasing factor neededRebasing factors are unique to their index series and cannot be substituted
37 Discontinued indexes and publication changes It is possible that a specified index may go out of publication during a contractBoth parties must agree upon an index to replace the discontinued (original) oneThe percent change cannot be calculated directly, but can be performed in two steps