The U.S. Bureau of Labor Statistics
announcement: Consumer Price Index (CPI-U): November, 2009
Released December
16, 2009
"On a seasonally adjusted basis,
the Consumer Price Index for All Urban Consumers (CPI-U) rose
0.4 percent in November, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months the index increased 1.8
percent before seasonal adjustment, the first positive 12-month
change since February 2009."
The BLS noted that the rate of annual change in the CPI-U was
positive for the first time since February. Late 2008 saw three
monthly decreases in the CPI-U and early 2009 saw very small
changes in most months. Fears of deflation - a sustained
decrease in the price level - expressed by many in late 2008
have disappeared as economic growth appears to have returned.
"The seasonally adjusted
increase in the all items index was due to a 4.1 percent
increase in the energy index. The index for gasoline rose
sharply and the indexes for electricity, fuel oil, and
natural gas also increased, creating the fourth consecutive
rise in the energy index and the largest increase since
August." A substantial portion of the overall price level
increase in November was attributed to energy prices. Energy
prices have risen more constantly recently after two years
of irregular decreases and increases. Figure 1, below, shows
the monthly changes in the CPI-U for selected product groups
for the past six months and the annual change since
November 2008. Note the significant changes in energy
prices.
|
Figure 1: Monthly & 12 Month
Changes in the CPI-U |
| |
May |
June |
July |
Aug |
Sept |
Oct |
Nov |
12 Months
Nov-Nov |
| All
Items |
.1 |
.7 |
.0 |
.4 |
.2 |
.3 |
.4 |
1.8 |
|
Food |
-.2 |
.0 |
-.3 |
.1 |
-.1 |
.1 |
.1 |
-.7 |
|
Food at home |
-.5 |
.0 |
-.5 |
.0 |
-.3 |
.0 |
.0 |
-2.9 |
|
Food away from home |
.1 |
.1 |
.1 |
.1 |
.1 |
.1 |
.2 |
2.1 |
|
Energy |
.2 |
7.4 |
-.4 |
4.6 |
.6 |
1.5 |
4.1 |
7.4 |
|
Gasoline (all types) |
3.1 |
17.3 |
-.8 |
9.1 |
.2 |
1.6 |
6.4 |
23.6 |
|
Fuel oil |
-3.3 |
4.8 |
-1.5 |
6.2 |
1.0 |
6.3 |
9.0 |
-6.9 |
|
Electricity |
-.4 |
-1.9 |
-.6 |
-.1 |
1.5 |
.6 |
1.4 |
.1 |
| All
items less food & energy |
.1 |
.2 |
.1 |
.1 |
.6 |
.2 |
.0 |
1.7 |
| New
vehicles |
.5 |
.7 |
.5 |
-1.3 |
.2 |
1.6 |
.6 |
4.9 |
|
Used cars & trucks |
1.0 |
.9 |
.0 |
1.9 |
1.6 |
3.4 |
2.0 |
5.8 |
|
Apparel |
-.2 |
.7 |
.6 |
-.1 |
.1 |
-.4 |
-.3 |
1.0 |
|
Services less energy services |
.1 |
.1 |
.0 |
.2 |
.1 |
.1 |
.0 |
1.4 |
|
Shelter |
.1 |
.1 |
-.2 |
.1 |
.0 |
.0 |
-.2 |
.3 |
|
Transportation Services |
-.1 |
-.1 |
.5 |
.6 |
.7 |
.4 |
.6 |
3.6 |
|
Medical care services |
.3 |
.2 |
.3 |
.2 |
.4 |
.2 |
.4 |
3.5 |
The Core Rate of Inflation in
November
The BLS also reported the "Core" rate of inflation - all
items less food and energy. The core rate excludes these
items because they are seen as historically more volatile.
Without the two items that tend to increase and decrease
more greatly around the average, some see a more clear
indicator of long-term inflation.
"In contrast, the index for all
items less food and energy was unchanged in November, after ten
consecutive monthly increases. Declines in shelter indexes
offset increases in the indexes for new and used motor vehicles,
medical care, airline fares, and tobacco. The food index rose
slightly in November. As in October, the food away from home
index rose modestly while the index for food at home was
unchanged. Within the latter, three grocery store food groups
posted increases while three declined."
Selected Consumer Price
Index Data for November 2009
Food
"The food index rose 0.1 percent in
November, the same increase as in October. The index for food
away from home increased 0.2 percent while the food at home
index was unchanged. Among the food at home groups, the dairy
and related products index declined 0.7 percent in November
after rising 1.0 percent in October, and the index for other
food at home also declined in November following an October
increase. In contrast, the indexes for fruits and vegetables and
for meats, poultry, fish, and eggs both increased in November
after declining in October. The index for nonalcoholic beverages
fell for the second straight month, declining 0.3 percent in
November, and the index for cereals and bakery products rose 0.1
percent in November after being unchanged in October. Over the
past year, the food index has declined 0.7 percent. The food at
home index has fallen 2.9 percent over the last 12 months, with
five of the six grocery store food groups declining, but the
index for food away from home has risen 2.1 percent."
Energy
"The energy index rose 4.1 percent
in November after increasing 1.5 percent in October. The index
for energy commodities rose 6.3 percent, with the gasoline index
increasing 6.4 percent. (Before seasonal adjustment, gasoline
prices rose 4.1 percent in November.) The rise in the gasoline
index accounted for over three-quarters of the total energy
increase. The remainder of the increase was due to advances in
all of the other energy components. The index for fuel oil rose
9.0 percent in November following a 6.3 percent increase in
October. The index for energy services increased 1.4 percent in
November, with the electricity index rising 1.4 percent and the
index for natural gas advancing 1.5 percent. The energy index
has risen 7.4 percent over the past 12 months, with the gasoline
index rising 23.6 percent."
All items less food and energy
"The index for all items less food
and energy was unchanged in November after rising 0.2 percent in
October. The heavily weighted index for shelter, unchanged in
October, declined 0.2 percent in November. Within the shelter
group, the indexes for rent and owners’ equivalent rent both
declined 0.1 percent and the lodging away from home index fell
1.5 percent. Also declining in November were the indexes for
household furnishings and operations and for apparel, both down
0.3 percent. Several indexes posted increases to offset these
declines. The new vehicles index rose 0.6 percent in November,
its tenth increase in the last eleven months. The index for used
cars and trucks advanced 2.0 percent in November and has now
risen 11.1 percent since April. The index for airline fares rose
3.8 percent in November and has increased 13.3 percent since
June. The medical care index increased 0.3 percent in November
and the index for tobacco advanced 1.0 percent. Over the past 12
months, the index for all items less food and energy has risen
1.7 percent."
Not seasonally adjusted CPI
measures
"The Consumer Price Index for All
Urban Consumers (CPI-U) increased 1.8 percent over the last 12
months to an index level of 216.330 (1982-84=100). For the
month, the index increased 0.1 percent prior to seasonal
adjustment."
"The Consumer Price Index for Urban
Wage Earners and Clerical Workers (CPI-W) increased 2.3 percent
over the last 12 months to an index level of 212.003
(1982-84=100). For the month, the index increased 0.2 percent
prior to seasonal adjustment."
"The Chained Consumer Price Index
for All Urban Consumers (C-CPI-U) increased 1.6 percent over the
last 12 months. For the month, the index was unchanged on a not
seasonally adjusted basis. Please note that the indexes for the
post-2007 period are subject to revision."
The Weighted Index
Figure 2, below,
shows the weights of the major categories of items making up
the CPI-U. Note how some categories (energy and other*)
have changed greatly in price level since the base period
of 1982-84. Other categories (apparel and
recreation) have changed very little in their price level.
The CPI-U for all items has increased from the base period
when it was 100 by 116.33 percent.
|
Figure 2: Consumer Price Index (CPI-U) Weights &
Index Levels by Category (Nov 2009) |
|
Spending Category |
Weight |
Index Level |
| Food
and beverage |
15.8% |
217.733 |
| Housing |
43.4% |
215.808 |
| Apparel |
3.7% |
122.645 |
|
Transportation |
15.3% |
188.587 |
| Medical
Care |
6.4% |
374.575 |
|
Recreation |
5.7% |
113.820 |
|
Education/Communication |
6.3% |
129.845 |
| Other* |
3.4% |
376.702 |
| All
Items |
100% |
216.330 |
| *Weights
established as of December 2009 |
* The "other" category includes items such as
tobacco products, personal care products and
services, and other personal services.
Connections to
Other Macroeconomic Data
It is sometimes instructive to find relationships between
various macroeconomic data. These relationships
may sometimes give us a more broad picture of the economy.
For instance, there is a general relationship between output
(GDP) and employment. As GDP increases, employment tends
to increase. In the past several months, as real GDP has
decreased, the unemployment rate has increased. One piece of
data confirms the meaning of the other. Figure 3 illustrates
four sets of macroeconomic data - CPI, unemployment, real
GDP growth and the federal funds rate. Notice the long term
relationship of periods of output growth and decline with
the changes in the unemployment rate. This relationship
makes sense as the number of employed is directly related to
output. Some increase in output can be attributed to
improvements in productivity, but growth is very much
dependent on labor force growth and employment. In late 2008
and early 2009, as U.S. real GDP declined, the unemployment
rate increased substantially.
|
Figure 3: Selected Macroeconomic Data 1999-2009 |
|
Year |
Real GDP
Change
(annual) |
Unemployment
Rate
(annual) |
CPI-U
(annual) |
Fed Funds
Rate Target
(March) |
|
1999 |
4.5 |
4.2 |
2.2 |
4.75 |
|
2000 |
3.7 |
4.0 |
3.4 |
6.00 |
|
2001 |
0.8 |
4.3 |
2.8 |
5.00 |
|
2002 |
1.6 |
5.7 |
1.6 |
1.75 |
|
2003 |
2.6 |
5.9 |
2.3 |
1.00 |
|
2004 |
3.6 |
5.8 |
2.7 |
1.00 |
|
2005 |
2.9 |
5.2 |
3.4 |
2.75 |
|
2006 |
2.8 |
4.7 |
3.2 |
4.75 |
|
2007 |
1.0 |
4.4 |
2.8 |
5.25 |
|
2008 |
1.1 |
5.1 |
3.8 |
2.25 |
|
2009 |
-4.7* |
8.5** |
1.8*** |
-0.25 |
|
*Real
GDP change data for 2009 is through the 3rd quarter.
**Unemployment is the monthly average through
November.
***CPI-U data is November 2008 through November
2009. |
Business Cycles
Business cycles or periodic fluctuations in growth and
employment illustrate the relationships of some data (see
Figure 4). When the National Bureau of Economic Research (NBER)
tracks cycles in order to identify recessions, they use the
combination of employment, GDP growth and other factors. How
do consumer prices fit into this analysis? The NBER uses
real GDP growth and real personal income as primary factors
identifying business cycles. Using employment and
income data adjusted for inflation allows the NBER to make
more accurate comparisons from one data period to the next.
Inflation and GDP
Accurate measurement of gross
domestic product or GDP growth is also dependent on the accurate
measurement of inflation. A rise in the price level "inflates"
the measurement of GDP growth - miscalculating real growth in
the economy. A more meaningful measurement of the growth of
output is real GDP - the nominal GDP measurement adjusted for
the impact of inflation. Although CPI is the most common
measurement of inflation for many uses, the adjustment of
GDP uses a process based on the GDP deflator. Both the CPI and
the GDP deflator are measurements of average prices, but the
GDP deflator includes all of the goods and services produced in
the economy, not just the CPI market basket. The GDP is the
market value of all goods and services produced in a year. Real
GDP is the market value of those goods at a constant price
level. Measuring the nation's output in a year at a constant
price level means that you can accurately compare it to the
output in another year.
CPI vs. GDP Deflator as Measures of
Inflation
The rate of inflation rate
determined by the CPI and GDP deflator are normally quite
similar. Since the CPI uses a fixed market basked of goods and
services, it assumes a fairly constant pattern of consumer
purchases. Over time, the market basket may be changed, based on
changes in consumer behavior. The GDP deflator uses a flexible
basket of goods and services based on the actual quantities
of goods and services produced in a year, while the prices of
the goods and services are fixed. The GDP deflator uses a much
larger quantity of goods and services.
The CPI does not take into account
substitution - the tendency of consumers to choose lower priced
goods in place of more expensive ones. Just the opposite
sometimes happens, as consumers may choose to purchase more
expensive goods as their incomes increase. The GDP deflator can
take these substitutions into account. Because the GDP deflator
assumes substitutions, it may underestimate the impact of
inflation when consumers do not (are not able to) substitute.
The CPI may overestimate the impact of inflation when consumers
do substitute.
Most government agencies and many
private contracts use the CPI to determine a cost of living
adjustments (COLA). The Social Security Administration added a
5.8 percent COLA to Social Security benefits and SSI payments in
January 2009, based on the percentage increase in the Consumer
Price Index for Urban Wage Earners and Clerical Workers (CPI-W)
from the third quarter of 2007 to the third quarter of 2008. If
there had been no increase in the CPI in that time period, there
would have been no increase in benefits.
Inflation and Unemployment
Long-standing economic theory had
assumed that there is a predictable trade-off between the impact
of public policy decisions and economic change on inflation and
unemployment. This theory, developed by New Zealand Economist
William Phillips in 1958, was based on his observation of an
inverse relationship between money wage changes (inflation) and
unemployment in the British economy over a period of time. The
"Phillips Curve" proposed that when unemployment is low,
inflation tends to be high and when unemployment is high,
inflation tends to be low.
The implication for policy makers
was that "Keynesian" policies could be used to control
unemployment and inflation. Increased spending can lower
unemployment with the risk of a high rate of inflation. Policy
makers face the Phillips Curve trade-off. Today, policy makers
who propose to use monetary policy (lower interest rates) or
fiscal policy (deficit spending) to stimulate the economy ,and
increase GDP and employment, are aware of its potential
inflationary effect. The Phillips Cure theory lost favor in the
late 1980s when there were periods of both high unemployment and
high inflation, followed in the 1990s by periods of low
unemployment and low inflation. The Federal Reserve recognized
the potential trade-off in its most recent monetary policy
statement when it justified an aggressive stimulatory policy by
saying that the current conditions did not include an
inflationary threat. Low inflation provides room for aggressive
policies to stimulate the economy. Should inflation become a
real threat, the Fed may slow down growth of the money supply.
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