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ACTIVITY ONE What is the Consumer Price Index?

T H E WA L L S T R E E T J O U R N A L C L A S S R O O M E D I T I O N. ACTIVITY ONE What is the Consumer Price index ? gathers prices for items sold to con- As of February 1998, here are the T. HE Consumer Price index is the broadest and most commonly sumers. The prices are then converted eight expenditure categories and their watched indicator of inflation in into 364 component indexes for every- relative importance to the overall CPI: the economy. (Inflation means a sus- thing from sneakers to gasoline. Housing tained rise in prices.) The Labor Department adds Transportation To measure inflation, the CPI together the components to form an tracks changes in the Price of a fixed index of all items. This index reflects Food and Beverages market basket of goods and services Price changes between the current Recreation typically purchased by consumers over month and a fixed period in the past. Medical Care a specific time period. (Currently, changes in the CPI are compared with the three-year period Education and Communication The CPI market basket symbolizes the spending of urban consumers who from 1982 to 1984).

THE WALL STREET JOURNAL CLASSROOM EDITION T HE CONSUMER Price Index is the broadest and most commonly watched indicator of inflation in the economy. (Inflation means a sus-

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Transcription of ACTIVITY ONE What is the Consumer Price Index?

1 T H E WA L L S T R E E T J O U R N A L C L A S S R O O M E D I T I O N. ACTIVITY ONE What is the Consumer Price index ? gathers prices for items sold to con- As of February 1998, here are the T. HE Consumer Price index is the broadest and most commonly sumers. The prices are then converted eight expenditure categories and their watched indicator of inflation in into 364 component indexes for every- relative importance to the overall CPI: the economy. (Inflation means a sus- thing from sneakers to gasoline. Housing tained rise in prices.) The Labor Department adds Transportation To measure inflation, the CPI together the components to form an tracks changes in the Price of a fixed index of all items. This index reflects Food and Beverages market basket of goods and services Price changes between the current Recreation typically purchased by consumers over month and a fixed period in the past. Medical Care a specific time period. (Currently, changes in the CPI are compared with the three-year period Education and Communication The CPI market basket symbolizes the spending of urban consumers who from 1982 to 1984).

2 Apparel make up about 80% of the popula- Other Goods and Services tion and who live mainly in areas with IS THE Price RIGHT? The other category includes per- more than 2,500 people. This may make it sound easy to cre- sonal-care products such as tobacco The official name of this index is the ate a Consumer Price index . In reality, and smoking products, along with Consumer Price index for All Urban the CPI demands a lot of research and other miscellaneous personal services. Consumers. (Another index , the Con- constant revision. Before the Labor sumer Price index for Wage Earners Department can come up with monthly Point-of-Purchase Survey: With and Clerical Workers, measures Price CPI numbers, it must know how much this general framework in hand, the changes for about 42% of the pop- money consumers spend, what they next task is getting specific annual ulation, but this survey isn't often used buy and where they buy it. data about where consumers shop and to measure inflation.)

3 To get this information, the Labor what they buy. Department combines data from three Every year, the Labor Department WHO WATCHES THE CPI? separate surveys: the Consumer conducts a Point-of-Purchase Survey The CPI is very important to the Expenditure Survey, Point-of-Purchase that asks consumers to provide this government, to financial markets Survey and Monthly CPI Survey. specific information. From this survey, and to consumers. Consumer Expenditure Survey: the Labor Department selects a sample The government considers the CPI Every decade or so, the Labor Depart- of items (goods and services) and out- when setting policy and budgets. The ment works with the Census Bureau lets (stores and establishments) popu- Federal Reserve also considers the CPI on a Consumer Expenditure Survey lar with consumers. in determining its policies and plans. that collects raw pricing data from Monthly CPI Survey: Finally, a Financial markets track the CPI diaries filled out by consumers and third study is used to complete the CPI.

4 And use it to predict market trends, from direct interviews with consumers. puzzle. The Monthly CPI Survey gath- because investor expectations of infla- Based on the raw data, Labor ers prices for the specific items pur- tion influence bond prices. Department economists get a general chased at the sample of outlets And the CPI directly affects con- idea of how much money consumers determined by the Point-of-Purchase sumers. It is used in about one-quarter spend, and allocate this spending into Survey. On-going pricing is conducted of all union contracts to adjust wages major expenditure categories. at 25,000 outlets for 95,000 items. to compensate for inflation, and it is The Labor Department economists The results appear in the monthly used by many nonunion employers for weight these categories based on the CPI Report and in a widely circulated the same purpose. It is also used to proportion of income consumers spent press release issued by Bureau of adjust Social Security and other bene- on the goods and services in each Labor Statistics.

5 Fits to keep up with inflation. group. Over time, these weights shift as prices change. So while the number HOW CPI SHOWS INFLATION. HOW IS THE CPI COMPILED? of items in the basket remains the Economists look at the CPI Report To get the background data for its same, each category's share of the mar- to help measure short- and long-term monthly CPI Report, the Department ket basket changes to reflect its rele- inflation. To determine short-term of Labor's Bureau of Labor Statistics vance to consumers. inflation, economists compare the 1998 Dow Jones & Company, Inc. All Rights Reserved. 800-544-0522 T H E WA L L S T R E E T J O U R N A L C L A S S R O O M E D I T I O N. most-recent month's CPI for all items Labor Department combine data for its 13 What does the Point-of-Purchase with the previous month's figure. CPI report? survey determine? For example, if the CPI for all items 14 Why is the Monthly CPI survey 8 What is the Consumer Expenditure were in November 1997 and important?

6 Survey? Why is it important? in December 1997, then prices fell between November and 9 What are the eight major expendi- 15 How do economists measure short- December. To get this figure, calculate ture categories in the CPI? term inflation? the difference between the indexes for 10 Which expenditure category repre- 16 How do economists measure December 1997 and November 1997, sents the largest share of the CPI? longer-term inflation? divide by the November 1997 index What is its share? number and multiply by 100 to convert Consumer Price index . to a percentage: 11 Which category represents the How does inflation affect you? Give ( ) = smallest share? What is its share? examples. How does it affect adults you * 100 = 12 Here is a list of 11 Consumer goods know? Give examples. To gauge longer-term trends, econo- and services. Into which of the eight Consider the seven major expendi- mists evaluate changes during length- categories would you place each one?

7 Ture categories in the CPI. Which cate- ier periods such as a year. A A used car gories do you feel are most relevant to B Gas for the car students your age? Why? Which QUICK QUESTIONS include goods and services that C Shampoo 1 What is inflation? teenagers are most likely to buy and D A carton of milk use? Which include goods and services 2 Why is it important for the govern- E Rent on an apartment teens are likely to use but not buy ment to keep track of inflation? F New sneakers (hint: consider goods and services your 3 What is the Consumer Price index ? parents or other adults buy for you). G Movie tickets 4 What does the CPI measure? H Toothpaste How might a Consumer Price index 5 Who watches the CPI? for teenagers differ from the national I Going bowling CPI? What would be the importance of 6 Who compiles the CPI? J A notebook for school a teen CPI to teenagers generally? To 7 From how many surveys does the K A pizza adults?

8 To the government? Answers 8 The Consumer Expenditure Survey gets 12G Recreation raw data from pricing diaries filled out by 1 A sustained rise in prices 12 H Other consumers and from direct interviews with 2 Changes in prices affect government pol- consumers. Based on the raw data, Labor 12 I Recreation icy and budgets. These changes also affect Department economists get a general idea 12 J Education and Communication the amount of money people get for Social of how much money consumers spend, and Security and other benefits allocate this spending into major expendi- 12 K Food ture categories. 3 The Consumer Price index is the broad- 13 From this survey, the Labor Depart- est and most commonly watched indicator 9 Housing, Transportation, Food and Bev- ment selects a sample of items (goods and of inflation in the economy. erages, Recreation, Medical Care, Educa- services) and outlets (stores and establish- tion and Communication, Apparel, and ments) popular with consumers.

9 4 The CPI measures changes in the Price Other Goods and Services of a fixed market basket of goods and ser- 14 The Monthly CPI Survey gathers vices typically purchased by consumers 10 Housing prices for the specific items purchased at over a specific period of time. 11 Other Goods and Services the sample of outlets determined by the 5 government and the Federal 12 A Transportation Point-of-Purchase Survey. The monthly Reserve; financial markets; consumers CPI is calculated from this data. 12 B Transportation 6 The Department of Labor's Bureau of 15 Economists compare the most-recent 12 C Other Labor Statistics month's CPI for all items with the previ- 12 D Food and Beverages ous month's figure. 7 Three: Consumer Expenditure Survey, the Point-of-Purchase Survey and the 12 E Housing 16 They evaluate Price changes over Monthly CPI Survey 12 F Apparel longer periods such as a year. 1998 Dow Jones & Company, Inc. All Rights Reserved.

10 800-544-0522 T H E WA L L S T R E E T J O U R N A L C L A S S R O O M E D I T I O N. ACTIVITY TWO How Do I Spend My Money? Never ask of money spent D Price of item or service, before What about change I spend in Where the spender thinks it went. taxes. If you can't get the pretax Price vending machines or parking Nobody was ever meant (for, say, a gallon of gasoline), note meters? For buses or subways? that the recorded Price includes tax. Record all these expenditures; they To remember or invent will help you get a complete picture of What he did with every cent. E Specific name of exact place how and where teens spend money. where you made purchase (for exam- Robert Frost ple, school vending machine, Target What about lunch or fast-food store) meals? If lunch at your school is I. N THIS ACTIVITY , we aren't always the same Price no matter what going to follow Mr. Frost's advice: F How frequently you typically pur- chase this good or service (daily, you get, record lunch with the Price .)


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