LSP 120

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LSP 120. CPI (Consumer Price Index). Prices Have Changed!. What do you remember? Try the simple example on http://facweb.cs.depaul.edu/LSP 120/cpi.htm So is a \$ today the same as a \$ yesterday?

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### LSP 120

CPI

(Consumer Price Index)

Prices Have Changed!
• What do you remember?
• Try the simple example on http://facweb.cs.depaul.edu/LSP 120/cpi.htm
• So is a \$ today the same as a \$ yesterday?
• Why do we care? What do you do when someone tells you something cost \$X twenty years ago? What about your salary?
Index Numbers
• How is the buying power of \$1.00 measured?
• How can we compare prices of items in different years?
• Use a price index or simply an index number
Index Numbers
• How do you create an index number?
• Working with a series of years and prices, choose a base period and set it to 100.
• Percentage increases (or decreases) from this base period are then calculated.
• For example, consider the average price of bread from 1980-1999:

to the price in 1980. Thus

Price in 1981Index for 1981

Price in 1980 = 100

or

0.53 = Index for 1981

0.51 100

Index for 1981 = (0.53 / 0.51) * 100 = 103.9 (What is this?? “Times more”

changed to a percentage!)

Similarly, for 1982 we use the ratio back to 1980:

Price in 1982Index for 1982

Price in 1980 = 100

The complete index number table will look like:

Index Numbers
• The neat thing about the index is how easy it is to see the percentage of increase of a price from the base year
• How much more did bread cost in 1992 than it did in 1980?
• What is the percentage change from 1989 to 1999? (174.2-130.8)/130.8 = 33.1%
Consumer Price Index
• An index is great for a particular item, but what about inflation in general?
• This is where the Consumer Price Index comes into play.
• The Bureau of Labor Statistics created an imaginary “market basket” of goods that an average family needs
Consumer Price Index
• The table on the next slide shows the official CPI since 1982 (it actually goes back to 1912).
• Note that the base price was not taken from one year but taken from the average of three years: 1982 – 1984.

YearCPI (1982-1984 = 100)

1982 96.5

1983 99.6

1984 103.9

1985 107.6

1986 109.6

1987 113.6

1988 118.3

1989 124.0

1990 130.7

1991 136.2

1992 140.3

1993 144.5

1994 148.2

1995 152.4

1996 156.9

1997 160.5

1998 163.0

Think of the CPI as the amount the average consumer would have to

spend in a given year to buy the same basic goods and services that

one would have to pay \$100 for in the base period.

How Do We Use the CPI?
• In 1990, gasoline cost \$1.16 per gallon (on average). In 1997, the average price was \$1.23. Did the cost of gasoline go up or go down?
• \$1.16 and \$1.23 are called current prices. According to these current prices, it looks like gas got more expensive. Is this accurate?
• Let’s compare the prices taking into account the changing value of money

We wish to know:

\$1.16 in 1990 dollars is equivalent to x in 1997 dollars?

160.50 (1997 CPI)x (1997 dollars)

130.70 (1990 CPI) = 1.16 (1990 dollars)

x = (160.50 / 130.70) * 1.16

x = 1.42

So when Americans paid \$1.16 per gallon for gasoline in

1990, it was equivalent to someone paying \$1.42 in 1997,

which is considerably more than what they were actually

paying in 1997 (\$1.23). The \$1.42 value is what we call

constant dollars.

The price of gasoline was cheaper in 1997 than in 1990!

Or look at it this way:

The ratio of 160.50

130.70

equals 1.228. This is how many times more one 1990 dollar was

worth in 1997.

So multiply the 1990 price of \$1.16 by this ratio (1.228) and you

will get the value \$1.42.

Let’s Try Another One
• A 1966 Schwinn 5-Speed Fastback bicycle cost \$69.95
• What would that cost today?
Let’s Try Another One
• Divide 2010 CPI by 1966 CPI and multiply by \$69.95
• (218.1 / 32.4) * 69.95 = \$470.87
More Uses of CPI
• You can use the CPI to convert an entire series of prices to constant dollars
• Consider the price of electricity from 1990 to 1998:
More Uses of CPI
• In graphical form, the data looks like:
Inflation
• Inflation is defined as the percentage increase in the CPI for a given year
• For example, the CPI in 1997 was 160.5; in 1998 it was 163.0.
• The inflation rate for 1998 was

(163.0 – 160.5)

160.5

= 1.6%

Salary in Constant Dollars

Salary

Years

Are you gaining income, losing income, or staying even?