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The Consumer Price Index:A User’s Guide
Kara MarkleyErin Delaney
Mid-Atlantic Information OfficeMay 19, 2014
BLS data
The U.S. Bureau of Labor Statistics (BLS) collects, analyzes and publishes data on our economy and our society. Inflation, prices, and spending Employment and unemployment Pay and benefits Workplace injuries and fatalities Productivity
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BLS stakeholders
BLS data is widely used by: Government policy makers Media Employees Managers Business owners Consumers Students Job seekers
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Presentation overview
What is the CPI? Uses of the CPI:
Contract escalation Other common CPI calculations
Website tutorial
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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 services
The CPI is themost widelyused measureof price change
CPI population groups All Urban Consumers (CPI-U): about 88% of the
total U.S. population Urban Wage Earners and Clerical Workers (CPI-
W): a subset of the CPI-U population; about 29% of the U.S. total
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2.32.7 2.7
1.5 1.5
3.0 3.0 2.9
1.3 1.4
0.0
2.0
4.0
Mar'10 Mar'11 Mar'12 Mar'13 Mar'14
Percent
CPI-U CPI-W
Source: U.S. Bureau of Labor Statistics
12-month percent changes in the U.S. city average CPI-U and CPI-W, not seasonally adjusted
Index: The “I” in “CPI”
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Index numbers show change over time from a base period, which is defined as 100.0 For example, an increase of 7.0 percent from the
base period is shown as 107.0
Index numbers are not dollar values
Index value changes are relative and depend on the base period
Percent changes must be used to interpret index movements
The CPI market basket Developed from detailed information on actual
purchases by families and individuals
Based on Consumer Expenditure Survey About 7,000 families from around the country
participated each year:
– Quarterly interviews about significant purchases
– Diaries listing every purchase during 2-week periods
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Food and Beverages Housing Apparel Transportation
Medical Care RecreationEducation &
CommunicationOther Goods & Services
CPI major expenditure categories
CPI relative importance Expenditure weight of a CPI component as a
percent of all items
Reflect actual distributions based on consumer expenditures Based on 2011-12 weights as of December 2013
Revised every two years to reflect changes in the economy such as: Income Climate & weather patterns Family size Goods & services in the marketplace
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Relative importance of CPI-U components, December 2013
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3.4
3.6
5.7
7.4
6.6
14.9
17.7
40.6
3.4
3.4
5.8
7.6
7.1
14.9
16.4
41.4
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0
Other goodsand services
Apparel
Recreation
Medical care
Education andcommunication
Food andbeverages
Transportation
Housing
U.S. city average
South
Percent of all itemsSource: U.S. Bureau of Labor Statistics
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Relative importance of CPI-U index groups, December
2013
Energy9.0
Food13.9
All items less food and energy
77.1
Source: U.S. Bureau of Labor Statistics
Expenditure weights for the U.S. city average (all urban consumers)
Also included in the CPI:
Various government-charged user fees: Water and sewerage charges
Auto registration fees
Vehicle tolls
Taxes directly associated with the prices of specific goods and services: Sales taxes
Excise taxes
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Excluded from the CPI:
Taxes not directly associated with the purchase of consumer goods and services: Income taxes Social Security taxes
Investment or savings items: Stocks & bonds Real estate Life insurance
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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: – Food – Energy– All items less food and energy: often referred to as the
“core” inflation index, removes the more volatile food and energy price changes
Also published each month are CPI-W, CPI-E, and Chained CPI-U.
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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 formula– Reflects the effect of substitution that consumers make across
item categories in response to changes in relative prices
The 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.
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Uses of CPI data
Economic Indicator
Deflator of Other
Economic Data
Adjusting Income
Payments
Contract Escalation
CPI as a basis for contract escalation
Contractual agreements often use the CPI to escalate or adjust payments Private sector collective bargaining
agreements Rental contracts Insurance policies with inflation protections Alimony and child support payments
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Percent change formula
CPIc − CPIp x 100
CPIp
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CPIc = CPI for current periodCPIp = CPI for previous period
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Percent change example
Now, calculate the 12-month percent change from March 2013 to March 2014.
Series Id:Item:Base
Year Jan Mar May Jul Sep Nov Annual HALF1 HALF2
2009 137.598 138.620 139.311 140.810 140.945 140.718 139.814 138.777 140.8502010 141.124 141.741 142.025 141.966 142.738 142.915 142.218 141.700 142.7362011 144.327 146.044 147.554 147.747 147.658 147.565 146.975 146.259 147.6912012 148.163 150.074 150.155 149.838 151.732 150.646 150.212 149.603 150.8222013 150.845 152.188 151.908 152.657 153.532 153.160 152.500 151.798 153.2032014 153.700 154.600
All itemsNOVEMBER 1996=100
CPI-U, Original Data Value, Washington-Baltimore area, not seasonal adjustedCUURA311SA0,CUUSA311SA
Calculating percent change
Computation of percent change:
CPIc 154.600
Less CPIp 152.188
Equals index point change 2.412
Divided by CPIp 2.412 / 152.188
Equals 0.0158
Results multiplied by 100 0.0158 X 100
Equals percent change 1.6
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Check your answer…
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Series Id:Item:Base Period:
Year Jan Mar May Jul Sep Nov Annual HALF1 HALF2
2009 1.0 0.4 -0.2 -0.9 -0.8 1.6 0.2 0.2 0.22010 2.6 2.3 1.9 0.8 1.3 1.6 1.7 2.1 1.32011 2.3 3.0 3.9 4.1 3.4 3.3 3.3 3.2 3.52012 2.7 2.8 1.8 1.4 2.8 2.1 2.2 2.3 2.12013 1.8 1.4 1.2 1.9 1.2 1.7 1.5 1.5 1.62014 1.9 1.6
All itemsNOVEMBER 1996=100
CPI-U, 12-Month Percent Change, Washington-Baltimore area, not seasonally adjustedCUURA311SA0,CUUSA311
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Unpublished percent change
Now try something that’s not in the database: Calculate the percent change from March 2011 to March 2014.
Series Id:Item:Base Period:
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2011 220.223 221.309 223.467 224.906 225.964 225.722 225.922 226.545 226.889 226.421 226.230 225.6722012 226.665 227.663 229.392 230.085 229.815 229.478 229.104 230.379 231.407 231.317 230.221 229.6012013 230.280 232.166 232.773 232.531 232.945 233.504 233.596 233.877 234.149 233.546 233.069 233.0492014 233.916 234.781 236.293
All items1982-84=100
CPI-U, Original data value, U.S. city average, not seasonally adjustedCUUR0000SA0,CUUS0000SA0
Check your work
236.293 − 223.467 x
100 223.467
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Percent change, March 2011–March 2014
= 5.7%
Get out your calculator…
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Escalation exercise: Office Space
Exercise: Office SpaceA 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.
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Series Id:Item:Base
Year Jan Mar May Jul Sep Nov Annual HALF1 HALF2
2009 137.598 138.620 139.311 140.810 140.945 140.718 139.814 138.777 140.8502010 141.124 141.741 142.025 141.966 142.738 142.915 142.218 141.700 142.7362011 144.327 146.044 147.554 147.747 147.658 147.565 146.975 146.259 147.6912012 148.163 150.074 150.155 149.838 151.732 150.646 150.212 149.603 150.8222013 150.845 152.188 151.908 152.657 153.532 153.160 152.500 151.798 153.2032014 153.700 154.600
All itemsNOVEMBER 1996=100
CPI-U, Original Data Value, Washington-Baltimore area, not seasonal adjustedCUURA311SA0,CUUSA311SA
Exercise: Office Space
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$5,000 x .019 = $95 increase for September 2013September 2013 rent = $5,000 + $95 = $5,095
Series Id:Item:Base:
Year Jan Mar May Jul Sep Nov Annual HALF1 HALF2
2012 148.163 150.074 150.155 149.838 151.732 150.646 150.212 149.603 150.8222013 150.845 152.188 151.908 152.657 153.532 153.160 152.500 151.798 153.2032014 153.700 154.600
Series Id:Item:Base:
Year Jan Mar May Jul Sep Nov Annual HALF1 HALF2
2012 2.7 2.8 1.8 1.4 2.8 2.1 2.2 2.3 2.12013 1.8 1.4 1.2 1.9 1.2 1.7 1.5 1.5 1.62014 1.9 1.6
All itemsNOVEMBER 1996=100
All itemsNOVEMBER 1996=100
CPI-U, Original Data Value, Washington-Baltimore area, not seasonally adjusted
CPI-U, 12-Month Percent Change, Washington-Baltimore, not seasonally adjustedCUURA311SA0,CUUSA311SA
CUURA311SA0,CUUSA311SA
CPI guidelines for escalation
General guidelines: DEFINE clearly the base payment to be
escalated IDENTIFY precisely which CPI index
series will be used to escalate the base payment
SPECIFY a reference period from which changes in the CPI will be measured
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CPI guidelines for escalation
General guidelines (continued): STATE the frequency of adjustment DETERMINE the formula for the
adjustment calculation PROVIDE a built-in method for handling
a major CPI revision or change in the CPI index base period
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Get out your pen and imagination…
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Write your own contract exercise:My Favorite Things
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?
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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: http://www.bls.gov/cpi/cpimathfs.pdf
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Annual average BLS publishes the average CPI for the calendar
year Sum of the 12 monthly data points, divided by 12
Series Id:Item:Base Period:
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
2009 204.288 205.343 206.001 206.657 207.265 209.343 208.819 209.000 208.912 209.292 209.738 209.476 207.8452010 210.056 210.020 211.216 211.528 211.423 211.232 210.988 211.308 211.775 212.026 211.996 212.488 211.3382011 213.589 214.735 217.214 218.820 219.820 219.318 219.682 220.471 220.371 219.969 219.961 219.469 218.6182012 220.497 221.802 223.314 224.275 223.356 223.004 222.667 223.919 225.052 224.504 223.404 223.109 223.2422013 223.933 225.874 226.628 226.202 226.289 227.148 227.548 227.837 227.876 227.420 226.811 227.082 226.7212014 227.673 228.664 230.095
Series Id:Item:Base Period:
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
2009 -0.1 0.1 -0.3 -0.7 -1.3 -1.4 -2.1 -1.6 -1.8 -0.4 2.0 2.9 -0.42010 2.8 2.3 2.5 2.4 2.0 0.9 1.0 1.1 1.4 1.3 1.1 1.4 1.72011 1.7 2.2 2.8 3.4 4.0 3.8 4.1 4.3 4.1 3.7 3.8 3.3 3.42012 3.2 3.3 2.8 2.5 1.6 1.7 1.4 1.6 2.1 2.1 1.6 1.7 2.12013 1.6 1.8 1.5 0.9 1.3 1.9 2.2 1.7 1.3 1.3 1.5 1.8 1.62014 1.7 1.2 1.5
CUUR0300SA0,CUUS0300SA0All items1982-84=100
All items1982-84=100
CPI-U, 12-Month Percent Change, South region, not seasonally adjusted
CUUR0300SA0,CUUS0300SA0
CPI-U, Original Data Value, South region, not seasonally adjusted
Constant dollars Use the CPI to “deflate” current (nominal)
dollars into constant (real) dollars
CPIr / CPIn x Value (U.S. annual averages)
Consider the following salary progression:
Nominal Real (2002 dollars)
2002: (179.9/179.9) x $40,000 = $40,000
2007: (179.9/207.3) x $45,000 = $39,052
2012: (179.9/229.6) x $50,000 = $39,177
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Purchasing power When prices rise, the same dollar buys less.
Use the CPI to determine how much less.
CPId / CPIp x 100
Example: What was the purchasing power of a 2002 dollar in 2012? (U.S. annual averages)
179.9 / 229.6 x 100 = 78.4
In 2012, a 2002 dollar buys 78.4% of its original value, or 78.4 cents
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CPId = CPI for the year of your “dollar”
CPIp = CPI for the “purchasing power” year
Conversion to other base periods
Some contracts may use a reference base that is no longer published
Contact the BLS for the specific rebasing factor needed Rebasing factors are unique to their index
series and cannot be substituted
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Discontinued indexes and publication
changes
It is possible that a specified index may go out of publication during a contract
Both parties must agree upon an index to replace the discontinued (original) one The percent change cannot be calculated
directly, but can be performed in two steps
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Contact Information
Kara MarkleyErin Delaney
Mid-Atlantic Information Officewww.bls.gov/ro3215-597-3282
