The Consumer Price Index and Value of a Dollar Chapter 5 Lesson

CPI : EVERY MONTH, 29,000 HOUSEHOLDS ARE ASKED…  About their purchasing habits during the last month.  The questions they are asked do change from time to time, based on trends of society. Eight categories are included:  1. Food and Beverage  2. Housing  3. Apparel  4. Transportation  5. Medical Care  6. Education and Communication  7. Recreation  8. Other Goods and Services

IMPORTANT FACTS …  “ =100” is a statement most often used to compare index numbers.  The Consumer Price Index average during the years was 100, so is used as the base period for the CPI. It covers the purchases of about 80% of the US population (rural areas are not included). Measures the change in the prices of goods and services over time (measures the buying power of the dollar). As the CPI increases, payments such as Social Security, government and military pensions, also increase (to meet the buying power of the dollar).

The lowest reported CPI was May, 1913 (9.7). The highest reported CPI (so far) was September, 2012 ( ) Comparing these numbers to = 100:  You could purchase the same item for $9.70 in May, 1913 that you would pay $100 for in  You would pay $ for the same item in Sept., 2012 that you could purchase in for $100.

How an Index Number Is Calculated… Round answer to the nearest whole number.  If the index number is 140, the value has increased by 40%.  If the index number is 75, the value has decreased by 25%.  If the index number is 100, the value is unchanged.

CPI over the years 2003: : : : : : : : : : : : : : : : : :

FIXED MARKET BASKET PRICE INDEX An index number for the total cost of the same items and/or services at different times. The items and/or services must be identical each time to be calculated.

Fixed Market Basket Price Index Because the Consumer Price Index goods and services changes with the changing buying habits of the public, it cannot be considered a true “fixed market basket price index”, since it doesn’t compare identical items all the time.

Adjusting for Changes in Buying Power

Example of Rising Income

SO THAT MEANS… Real incomes increased from $37,010 to $42,151 (in year 2000 dollars). This was only a 14% increase, not a 238% increase as it appeared.