Percentage increase in price of items from 1962 to 1998 Item Percentage Increase in Price Hershey bar1180% New York Times1100% First class postage700% Gasoline (gallon)284% Hamburger (McDonald's double) 861% Chevrolet (full size)790% Refrigerator freezer60%
Consumer Price Index The Consumer Price Index (CPI) is a measure of the general change in prices over a given amount of time. Look at CPI
Components of the CPI Housing41.4% Transportation17.8% Food16.2% Energy8.2% Medical Care6.4% Apparel and Upkeep6.1% Other3.9%
Inflation Calculate inflation from 2005 to 2006 You calculate inflation from 1929 to 1930
We found that the inflation rate from 2005 to 2006 was 3%. If your boss in 2005 said that over the next year you were going to get a 2% raise would that make you smile? Why or why not?
Ratio of Prices Ratio of two indices 2006 to 2005 On average consumer goods of 2006 cost 1.03 times that of 2005.
CPI TThe value of the dollar changes how do we compare prices (actual dollars)? WWe can use the CPI to adjust prices (constant dollars) so that we can accurately compare them. AActual Dollars = an absolute dollar value CConstant Dollars = dollars that have been adjusted to reflect inflation
In 1930 Babe Ruth made $80,000 per year. Currently Albert Pujols is in negotiations to make $31 million per year. In terms of actual dollars Pujols is making a lot more. But in terms of constant dollars did Ruth make more or less than Pujols?
Find the CPI values for your two years (2010 and 1930) and convert Babe’s salary to 2010 constant dollars Converting to Constant Dollars
But in terms of constant dollars did Ruth make more or less than Pujols?
“Expensive” You can check to see if some good increased in price at the same rate as the CPI or at a slower or faster rate. For example, the price of gasoline in 1981 was $1.38 per gallon on average. In 2005, it averaged $2.30. Was gasoline more expensive or less expensive in 2005?
“Expensive” Need to take inflation into consideration. Convert the 1981 price to 2005 constant dollars.
“Expensive” Since $2.96 is more than the $2.30 that people were actually paying in 2005, gasoline was more expensive in 1981 than it was in 2005 after we account for inflation using constant dollars. Put another way, the $1.38 you were spending in 1981 was affecting you more than the $2.30 you are spending in 2005.