Sep 27 2012

Understanding the Consumer Price Index – the Fed’s “Drawing Board”

Published by at 8:36 am under CPI,Inflation,Macroeconomics

MV=PQ: A Resource for Economic Educators: Some Classroom Resources

Special thanks to Tim Schilling at MV=PQ blog for pointing out the Cleveland Fed’s interesting video series called the “Drawing Board”.

This video introduces the concept of Consumer Price Index as a measure of inflation in the United States, shows how CPI is calculated, and then goes into a bit more detail than perhaps the AP or IB student needs when it introduces a new method of measuring inflation used by the Fed called “median inflation”.

AP and IB students can benefit most from watching up to 4:12. In this first half of the video the CPI is defined, its measurement demonstrated, short-comings discussed and the “core CPI” explained.

Discussion Questions:

  1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
  2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
  3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
  4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

114 responses so far

114 Responses to “Understanding the Consumer Price Index – the Fed’s “Drawing Board””

  1. kkozlovskison 22 Apr 2013 at 10:07 pm

    They weight diiferent items differently becasue we use some items more frequently than others, so we spend more money on them, so they are more important to us, so they need to have extra attention. The type of the goods that get the greatest weights compared to others are those items which we use on dially basis.
    The CPI as showned in the video is in a some way better way to measure inflation, even if it’s not accurate. The whole job of the government is based arounf CPI, because out of CPI they can somehow predict what’s going to happen in near future, so that they could bypass the shock part of the reccession. If the price level would rise then we would need to spend more money on these products, and as most of the times the wages don’t change alot, then when a higher price level sets in then you would be able to buy less, because you had less money to spend, and we want to spend more and more money, and that’s why we are so interested in changes in economy.
    When we use the traditional method then we cannot understand whether the price level is changed only for one good or the whole market, and it’s really important to know this, because as we see they are both the same, but if the price rises only for one product then we cannot say that it’s an inflation.
    They axcluded oil and food from the core, because the prices in these segments changed so many times in short period that it couldn’t be talked about inflation. In the most cases the change in prices in these two segments showed the activity of monopoly or oligopoly, and that they changed prices, and tested the theory.

    # ylahham
    I really liked your commentary for the most part, but about the weights. I thought that we need to spend money for everything we buy, so saying that the items which weight the most are the ones we need to pay for is a bit silly. I understand that you didn’t mean it in that way, but probably those are the items on which we spend rhe lagest part of our income.

  2. cameron7on 22 Apr 2013 at 11:52 pm

    Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    The BLS weights different items included in the measure of the CPI differently. This is because there are some goods; such as housing, that consumers spend a greater proportion of their income one, relative to others; such as clothing. Therefore, the weighting is different and takes consideration in the measure of the consumer price index.

    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The CPI allows the measure of the value of goods and services in different years; and therefore compare values and can recognize inflation or deflation. We care about changes in the price level in an economy as it could reflect slight inflation or deflation; and government/central bank intervention can then attempt prevent the situation from worsening. CPI is significant and is always considered in order to also recognize what sector has a bigger role in the economy.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    One shortcoming is definitely Inaccuracies when collecting data; as well as the use of different “baskets” in differing countries can make CPI values of the countries inaccurate; and make it more difficult to accurately compare them to one another. Additionally, the presence of discounts in many countries (which attract more sales) could seem to reflect a price change when collecting the data for the CPI; when, in fact, no price change has occurred. Also the exchange rate can be a shortcoming since it is a factor that changes every day and therefore presents inaccuracies.

    Why did the BLS decide to exclude oil and food prices from its “core CPI” figure?

    The BLS decided to exclude oil and food prices from its “core CPI” figure because they are subject to relative price changes. This means that the prices of oil and food are volatile and change rapidly. Therefore they excluded those factors from the core CPI figure.

  3. cameron7on 22 Apr 2013 at 11:55 pm

    # kkozlovskis

    Very good answers I mostly agree with them. I agree with your first answer where certain factors are more significant in the economy than others therefore are weighted differently. Consumers spend a larger proportion on housing for example therefore has a higher CPI than other sectors.

  4. bobby con 23 Apr 2013 at 2:21 am

    Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    Because different items tend to have a stronger effect than others. The example used in the video was jewelry and rent. A larger % change in rent would have a much greater effect than an equal percent change in jewelry, so the rent would be weighted stronger as it has a more important role to civilians. Goods that are necessary tend to be weighted greater.

    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    A few purposes for the CPI is to alter social security of determine how much taxes will be. The changes in price level in an economy is important to know because it will determine the inflation year over year.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    The problem is that when items were measured, random spikes would be included that would greatly affect the overall CPI. If a good were to all of a sudden fall or rise significantly for no reason, the data would affect every other product.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The BLS realized that when it came to oil and food, these were the most common to have these random price spikes, affecting every other product and the CPI as a whole. Excluding these products means that the CPI will be more accurate and not include these random price spikes.

    # MeganK

    Hi,

    You bring up great points. Looking at your third question, I think that weighing different items is a positive because some are definitely more important than others and should have a larger impact, but it is also true that a few of the “big players” falling or rising significantly would alter every other number and make the number almost insignificant as it is no longer accurate.

  5. rkangon 23 Apr 2013 at 4:46 am

    1.Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    – Not all of our income is distributed evenly to a set of goods and services. There are items that we spend a large portion of our income on. In our day and age, people spend a substantial amount of their income to get gas to operate their automobiles. Other goods like jewlery isn’t as frequently bought as gas. People may still spend some portion of their income on jewlery but jewlery is really considered to be a luxury item. Gas can also be seen as a luxury item but to be frank, gas has now become more of a necessity. Each type of good or service has a different weight in measuring the CPI. The more important and frequently used the good or service, the large weight is has in the CPI. This also has to do with measuring the CPI to some degree of accuracy.

    2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    – The CPI serves as an indicator to determine the adjustments of the cost of living, taxes, and things like social security benefits. This is all useful information the government should have when making such decisions. The changes in the price level of an economy point out what direction the economy is moving towards. When the price level of an economy increases, this is a sure indication of inflation. When the price level of an economy decreases, this is a sure indication of deflation.

    3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    – It is very difficult to accurately come up with the inflation rate using the CPI. Since people have different incomes and different spending habits, the baskets of goods and services that economists use will not always be the same. The inflation rate that was calculated in the end may be somewhat erroneous. There are just way too many variables that economists have to consider in order to get an accurate picture of the inflation rate. There are just too many things that the traditional method for measuring inflation rate will not be able to cover.

    4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    – Food and oil are goods that are very volatile. Meaning, the prices of food and oil fluctuate very frequently. The fluctuation of one good of service isn’t what inflation is. Inflation is the increase in price of ALL goods and services. There are seasons and years when harvests are good and food costs are generally low. However, there are time when the weather prevents good harvests and food costs end up skyrocketing. Inflation or deflation has no part in the flucuations with food. This the same deal with oil. In the end, it all depends on the volatility of the good or service.

  6. rkangon 23 Apr 2013 at 4:54 am

    #bobby c
    Hi. I wouldn’t say that the fluctuations of such goods that are excluded from the core CPI are RANDOM price spikes. Goods like food really depend on the weather and the weather has a HUGE impact on the price of food. It really isn’t random. Also the price of oil fluctuates depending on the supply/demand of oil. The supply of oil really determines how much countries (especially many Middle Eastern counries) want to sell their oil for.
    But overall, really solid and concise answers.

  7. msurninon 23 Apr 2013 at 3:38 pm

    1. Why does the Bureau of Labour Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    Different items, goods and services are subject to relative price change to different extents, and therefore, people spend different amounts of money on different types of goods. Some goods such as food and energy are volatile – they are subject to large frequent price changes, and can greatly affect the CPI (Consumer Price Index). In order to protect CPI from large changes caused by volatile goods, they are excluded when calculating CPI. Moreover, consumers spend different amounts of money even on non-volatile goods, for example, rent and jewellery, as shown in the video. Depending on the percentage of total income of a consumer spent on each of those goods, the Bureau of Labour Statistics weight different items included in the measure of the CPI.
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    While the CPI is one of the ways to measure inflation in an economy (the change in the price level), it also serves different purposes for consumers, investors, banks and the government. Banks use the CPI to determine whether or not they should change interest rates, government uses it in fiscal policies, etc.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    Some volatile goods such as food and energy, which experience large changes in their price level can affect the value of the whole CPI, either drastically increasing or decreasing it, while nothing else really changes. The core CPI helps to overcome this problem, as it excludes food and energy.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    As stated above, the BLS decided to exclude oil (energy) and food prices from its core CPI figure, as those items experience the most drastic price changes, and can significantly change the value of CPI, while nothing else really changes. Their exclusion allows to get a more precise CPI value.

  8. msurninon 23 Apr 2013 at 3:50 pm

    #rkang

    I liked your answer to the question #3 – even though BLS weights different items differently when calculating the CPI, it still can be fallacious, as everyone’s spending habits are different, and we are able to get only the average of those values. Do you by any chance know any other indices that allow to measure the change in the price level (inflation) that are a bit more accurate?

  9. clundon 23 Apr 2013 at 4:05 pm

    1. One doesn’t spend an equal amount of money on all goods and services bought, so a change in price of e.g. food will effects ones budget much more than a change in price of pencils and are therefore weighted more heavily in the CPI.
    2. The purpose of CPI is to find out if prices are stable, inflating or deflating to be able to predict “their next move”. This is important for us to know how to use our money. If we knew ex that inflation is in transit, it would be a good idea to buy that computer you’ve needed for awhile where as if prices where to deflate you would be well-advised to wait a bit longer before you buy the computer since your wages are not as likely to change at the same rate as prices and will therefore make the computer more or less expensive depending on which direction the prices are changing.
    3. One short-coming is if a relative price change occurs and makes a change in the whole CPI, and will resemble a inflation even though it isn’t, which is why the median CPI has been developed.
    4. The BLS decided to exclude oil and food prices from its core CPI figure because they are the two goods with the highest frequent relative price change occurring, so by excluding them it makes the CPI more reliable.

  10. clundon 23 Apr 2013 at 4:23 pm

    #Bobby C

    Hi, it seems like you’ve understood the video and the principles of CPI, but you might just want to explain yourself a bit more, so it becomes clearer, what you intended to say. E.g. you say that:” different items tend to have a stronger effect than others” here you might want to explain what you mean with effect like ex ” we use more of our money on certain goods and services than others, so if a relative price change occur for these products it will have a greater effect on our budget than if it had been for a product that we only use a small percentage of our money on.

  11. jyoungon 23 Apr 2013 at 4:27 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    They weight items differently in the measure of CPI because people will spend different proportions of their income on different items. For example a higher percentage of income will be spent on housing which means that it will have a higher weighting.
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    The CPI measures inflation (and deflation). This persistent increase in average price level can lead to negative consequences like a loss of purchasing power, a decrease in the competitiveness of resources, reduced investment from uncertainty etc.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The CPI ‘basket’ in representative of a typical household, but it does not apply to everyone. This means that depending on what you spend your income on, inflation could be smaller or higher than the given CPI.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    Because food and energy prices change many times for unjustified reasons and seasonal variations. These fluctuations would have a big impact on CPI.

  12. clundon 23 Apr 2013 at 4:27 pm

    #Bobby C

    Hi, it seems like you’ve understood the video and the principles of CPI, but you might just want to explain yourself a bit more, so it becomes clearer what you intended to say. E.g. you say that: “different items tend to have a stronger effect than others” here you might want to in-depth your explanation of what kind of items you refere to like ex “we use more of our money on certain goods and services than others, so if a relative price change occur for these products it will have a greater effect on our budget than if it had been for a product that we only use a small percentage of our money on.”

  13. jyoungon 23 Apr 2013 at 4:28 pm

    # rkang
    Good answers, I like your point about CPI being useful for the government as well as central bank when making decisions and policy. I certainly would not want to be the one calculating CPI for a country, especially if food and oil were included.

  14. dtumanavarroon 23 Apr 2013 at 6:33 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weight than others?

    The BLS weights different items differently depending on how important they are or how much consumers on average spend on them. An example of a good/service that has a heavy weight in CPI would be transportation.

    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The CPI figure measures price changes and helps predict future inflation rates. Changes in the price level in an economy have a big affect on our finances and how we live. Will we have a low and steady inflation or will it increase at a rate deemed dangerous? Will we have a good deflation rate or a bad one? Price levels say a lot about the employment rate within the country.

    3. What is one short-coming of the traditional method used for measuring the inflation rateusing CPI?

    When using just the CPI it’s hard to differentiate between a relative price change, which is an increase in the cost of one thing we purchase and actual inflation. Also, people make use of discount price changes of volatile and come goods that the CPI doesn’t include, leading to a higher expected increase in inflation.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The BLS decided to exclude oil and food prices from its “core CPI’ figure because oil and food are volatile goods that can have extreme changes in price not related to inflation.

  15. dtumanavarroon 23 Apr 2013 at 6:38 pm

    #jyoung

    Hey man, I agreed with your answers and I liked how you responded differently to question 3 than most of us did. I liked how instead of using the tea example used in the video, you brought up the “CPI basket” and how everyone spends their income on different things in different balances.

    Thanks!

  16. Malen Kon 23 Apr 2013 at 6:38 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    The Bureau of Labor Statistics weighs different items included in the measure of the consumer price index because different person’s income might goes towards a different purchase. It is necessary to identify which goods or services are more important in comparison with others, as they take up a larger share of the consumers’ income so as to accurately show the effect of inflation on a particular good for an average consumer. The types of good that gets a greater weight than others are goods that consumer pay most for, like food, electricity, rent, etc. The weight will be greater for goods or services that are more important.

    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    The CPI tracks how much the price of cost of living, social security, taxes changes each month. The CPI figures are often used to make cost of living adjustments, adjustments to how much people are going to be paid in social security benefits and the amount of taxes that people pay and other things. However, it is not a good measure of inflation month to month. Inflation is a general rise in the prices of the general things we buy. We care about the changes in the price level in an economy because these changes will affect the CPI as CPI measures the change in the average price levels. Therefore, these changes also affect how much money is worth.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    As mentioned in the video, for example, people start drinking more tea instead of coffee and all of a sudden people starts to buy more tea. Therefore, the price of tea is going to sky rocket, it may jump so much even though it carries a relative low weight in the consumer price index, that it drives up the CPI by like 10%. This is not inflation but it is the spike in the cost of one thing we buy, which is called relative price change. People shifted consumption from one good to another and the price of that second good went up, all prices did not rise. That is the problem with CPI to measure inflation especially in over a short period of time. CPI might be pushed up by price swings and price swings are not really inflation therefore it is not an accurate measure of inflation.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    The BLS decide to exclude oil and food prices from its “core CPI” figure because they are subject to large price swings, which means that oil and food prices are always going to be affected by this large price swings and price swings aren’t really inflation therefore, inflation measurements are inaccurate since those prices have nothing to do with inflation.

  17. Malen Kon 23 Apr 2013 at 6:39 pm

    #alee

    Direct and short response! You’ve managed to cover all the necessary points in the questions so well done! Perhaps, you can give me some examples of the type of goods that weigh more than others?

  18. Sasha_Son 23 Apr 2013 at 6:42 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    Different items end up being weighed differently to one another because their significance varies from consumer to consumer, meaning that certain goods appear to have more precedence than others, and hence take different amounts from the income of the consumers. The categories exist to represent this idea of significance of a product between different consumers, with the weight representing their importance to their income. Energy prices and food in particular have much weight, as they take a large share of the income of many consumers. With a large section of a consumer’s income spent on these two in particular, the CPI will increase or decrease with the prices of energy and/or food. Food and energy are very important to consumers because they can be considered price-inelastic, as they are necessities, so to speak. People need food to live, and people need energy to live in the modern world (in a manner of speaking), through transportation, their household, etc. The propensity of high inflation rates (if included) and price volatility for these two categories essentially excludes them from consideration from the Bureau, as most other categories do not fluctuate as greatly. Considering volatile categories amongst things that remain relatively consistent tends to make the CPI much less reliable, making other categories much easier to include without having relative price changes.

    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The price level in an economy essentially dictates the required adjustments for social security benefits, taxes, and the cost of living. With inflation, consumers tend to have less ‘purchasing power’, meaning that they end up having to buy less for ‘more’ of their income. This is a result of devaluation of their currency, a byproduct of high inflation. Inflation itself is measured by price changes, but the price change of one product is no real implication of inflation, as it really is only one product that makes the price level change, so to speak. Price level is an important concept to consumers because it dictates the way in which people live their lives. Price levels determine the average price of products that perhaps people rely on every day, or people deem a necessity in their live for whatever purpose. It partially dictates the allocation of people’s incomes. Increases in price level will result in devaluation of the currency, which, again, results in less purchasing power, causing habitual changes of consumers. Loaning may also become a problem, i.e. if someone were to lend money prior to a price level decrease, the person who borrows would benefit as the value would increase for them, but the lender would lose money as the value of the money that they just lent increases. This may contribute to imports and exports, as certain imports, due to some inflationary happening, may be more expensive than they were as a result of more value in their currency, making it more expensive than it typically would be, forcing a change in importer.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    Inflation rates are made inaccurate by CPI through the idea of generalizing the populace. CPI only takes into account the items found in a typical household within a given nation, generalizing and averaging out everybody’s habits into one amalgamated figure. There is no consideration for things like age and gender, which themselves dictate what is found in people’s ‘basket’. A girl may end up wanting to purchase a higher quantity of cosmetic products in comparison to that of a male, or a young boy may be more fixated on buying toys than an old man who is at retirement age. The samples are so limited that there is far too much that is not taken into account, meaning that much of the CPI’s data is already too ‘small’ a sample to be considered an accurate average.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The exclusion of both oil and food prices is credited to the idea of food and energy being highly volatile categories of the CPI, meaning that they are subject to large price increases and decreases that may very well have nothing to do with inflation, which causes the inflation rate itself to fluctuate and appear more erratic and inaccurate.

    Malen: Quite the concise response, I see. On your response to the last question, would there be any other part of the ‘core CPI’ that would be considered worth removing based on volatility? What do you think makes oil and foods such volatile categories as it pertains to CPI?

  19. nwarneron 23 Apr 2013 at 6:42 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weight than others?
    They weigh the items based on how much people will spend on them so the items that people spend the most on will impact the CPI the greatest amount. This way because people spend more on food rather than luxury items it will have a higher weighting.
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    The CPI measures inflation or deflation and how it impacts the average consumer. The increase in average price level measured by CPI has negative effects on consumers as purchasing power decreases this can cause slower economic growth. This can shake confidence in the economy causing all sorts of problems such as reduced investment among many others.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The CPI is a measure of the average CPI in a typical household. Therefore, it does not apply to all households. This means that due to differing circumstances the actual inflation could be different based on income, debt and amount of fixed items.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    This is due to the fact that these items have huge shifts with vague reasons that would have a great impact on CPI

  20. nwarneron 23 Apr 2013 at 6:43 pm

    #clund
    I like your answers. I especially like your answer to question 4. It is very descriptive and describes your reasons well using economic terminology. Your use of economic terminology makes the answers useful for relating concepts to economic ideas.

  21. m2keoon 23 Apr 2013 at 7:10 pm

    My Response:

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    The Bureau of Labor Statistics weights different items included in the measure of the consumer price index because not everyone spend the same amount of money on the same thing as each and everyone of us has our own wants and needs. Therefore, in order to increase the accuracy of measuring inflation rate, it is very important to differentiate the goods and services that are most consumed from the rest of the goods and services. These goods and services are then grouped into different categories with given weights along with index prices to reflect its importance in the average consumer’s income. As mentioned in the video, energy and food prices are the two categories that are weighted heavily as they are also very heavily consumed, which also means that they take up a huge proportion of consumer’s income. Since energy and food prices are subject to large price swings, Bureau has decided to exclude this, as price swings are not really inflation and if they are included then we are really not measuring inflation very well.

    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The CPI figures indicate the average price changes each month. These figures can be used to help adjust cost of living, as an economic indicator, a deflator of economic series, and to adjust dollar values, etc. The accuracy of inflation relies on the data collected and since it is very impossible for us to look at all goods and services, it is fair to say that the measurement of inflation will not be fully accurate. We care about changes in price level in an economy because we are obviously affected by it in one way or another. As a consumer, my spending habits will obviously change as inflation would only means an increase in prices of goods and services. Other stakeholders such as producers, suppliers, investors, government, etc. are all affected by it as well but just differently.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    One short-coming of the traditional method used for measuring the inflation rate using CPI is essentially the inaccuracy of the data. The basket used in any country represents the purchasing habits of a ‘typical’ household, but this is not applicable for all people as people have different spending habits. Thus, leading to inaccuracy and unreliability of the data used.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The BLS decided to exclude oil and food prices from its “core CPI” figure because they produce price swings when consumers changes their consumption of one particular good to another and this is not inflation. It is just a relative price change that does not help in measuring inflation as there is no relation to inflation or whatsoever.

    Comment:
    # alifsigridardottir
    Great response! CPI figures do help to adjust cost of living, how much tax to pay, etc. but what do you think is its main purpose? You’ve also included many valid examples, which is great since it does help to further support your point. Seems like CPI does have a handful of limitations compared to BLS so I’m actually really curious as in why many countries choose to use CPI instead despite its pullbacks. What do you think?

  22. alessiaayoubon 23 Apr 2013 at 7:24 pm

    RESPONSE TO QUESTIONS- Alessia Ayoub
    1) The BLS weights different weights according to the proportion of income spent on that good or service. Which means that the higher the % of income spent on a good the greater the ‘weight’. Rent usually gets a very high weight as people spend a large proportion of their income on rent, however rent has a much lower weight in third world countries where they struggle to pay for food/water and hence water/food would have a greater weight.
    2) CPI is a measure of the cost of living for an average household, if inflation goes up then people will be worse off if their income do not increase at the rate of inflation. This means that they will buy a smaller amount of goods with the same amount of money (vs. previous to the inflation). If the price level goes up due to demand-pull inflation then the government could possibly need to raise direct taxes to decrease aggregate demand and this would mean that people have less disposable income.
    3) One short-coming is that one item that has had a EXTREME change in price (in this video tea was mentioned) would give the wrong picture of the inflation rate as the all other items prices might have stayed sort of constant.
    4) The BLS decided to do this because food and oil prices are highly volatile meaning they vary a lot in a short timespan and this would give misleading/inaccurate figures of the rate of inflation.

    Comment:
    # m2keo
    Amazing response! Thats true the basket is just about the typical household, I didn’t think of it in that way before. For example in India with the social classes, I wonder how they generalize…

  23. amcpikeon 23 Apr 2013 at 7:41 pm

    Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    Your average consumer will spend a different percentage of their total earnings on different goods. For example they may spend a quarter of our salary on food, and merely a few percent of it on pet food. With this in mind, the Bureau of Labor Statistics allots a different weighting to each product that consumers buy in order to accurately reflect inflation rates. The goods that we spend a larger percent of our income on, will have a greater weighting in the CPI calculations. This means that fluctuations in the prices of goods such as electricity, oil, food, etc. will have large affects on inflation rates, which in turn affect the the cost for everyday products, the price of loans, return from investments, taxes, and infrastructure growth.

    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The CPI serves as a good measure of how strong or healthy an economy is. Although at the same time knowing what the inflation rate of the economy is can serve a number of practical benefits as well, including but not limited to: determining taxes, pensions, interest rates and wages. The CPI can also help the government develop fiscal and monetary policy specifically designed to combat any issues that the countries economy may be facing.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    One of the most common issues with the traditional method of measuring inflation using CPI is that it can be influenced by the relative price change of a single commodity. In the example that we were given in the “The Drawing Board” video linked above the CPI of a country rose ten percent following an increase in the demand for tea. What this means is that changes in the price of a single commodity —even with only a small percentage allotted to it in CPI calculations— can influence inflation rates across the country.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The BLS, being aware of the aforementioned flaw in CPI calculations, would have excluded oil and food prices because of their high price volatility and impact on the final statistic. Because a large majority of our incomes is typically spent on food and oil related products they would have both received a large weighting in CPI calculations. This large weighting coupled with the price volatility that arises due to fluctuating weather patterns, diseases, civil wars, etc. would —in the minds of the BLS— have only served to make the statistic less reliable.

  24. amcpikeon 23 Apr 2013 at 7:44 pm

    #lannis

    I would have to agree with you completely that it is difficult to compare inflation rates between companies. Would you suggest the creation of an international organization with the sole purpose of comparing statistics like these?

  25. skangon 23 Apr 2013 at 10:29 pm

    Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    -Certain items have more weight because we spend a different proportion of our income on different things. These goods are more important and thus have more weight than other items. Goods that we spend a larger proportion of our income on get a large consumer price index.

    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    -The CPI can measure how healthy or unhealthy the economy is. The government uses the CPI in order to determine how to set new fiscal or monetary policy in order to help make the economy healthier or less “unhealthy.”

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    -The biggest problem is that the CPI can be adjusted based off of changes in different items. It can fluctuate very easily and is thus slightly unreliable.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    -These figures adjust too easily and thus the BLS decided to excluded oil and food prices from their core CPI figure. Also, most of our income is spent on food and oil, thus their CPI weighting would be very high. As a result of the volatility of these prices, the CPI would shift far too much.

  26. skangon 23 Apr 2013 at 10:31 pm

    # amcpike
    I agree, the CPI can help the government determine monetary and fiscal policy and is very useful to the government in helping determine whether or not their economy is sickly or healthy. However, due to the volatility of the CPI,is it really that reliable?

  27. rparsonon 24 Apr 2013 at 2:18 am

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    The BLS weights different items in the CPI because these items make up more of consumer spending, and are more important is tracking overall effects of price changes.

    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The CPI figure can be useful to track inflation, because shifts in the price level in an economy can be used as a diagnostic tool to decide how the government should best act, eg. How much seniors need in social security in order to cover their typical cost of living.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    The traditional method can include individual products which experience massive price shifts on their own, which while not important for the overall shift in prices, an affect the average value and skew results.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The BLS decided to exclude oil and food prices form the core CPI figure because these are typically the goods which are the most volatile in their prices, and are therefore less useful for examining the overall trends in prices.

  28. rparsonon 24 Apr 2013 at 2:21 am

    @nwarner,
    I like your answer 3 distinction between the average household and the real needs of households. I imagine, for instance, that most people do not need to feed 2.5 children!

  29. Csabaon 24 Apr 2013 at 8:45 am

    1) The BLS is based on the amount of money spend on the product and since we do not spend the same amount of money on every product the BLS relies on an average. This average is based on the fact that people spend more money on nutriment rather than luxury goods in leads to an higher weight

    2) The CPI figures give us the information about the price change in the economy. This price change affects most of the

  30. Csabaon 24 Apr 2013 at 8:59 am

    i accidentally pressed the Submit button

    2) the CPI figures give us the information about the price change in the economy. This price change affects most of the people depending on their position in the economy.

    3)In this method the change in CPI is taken into account since it can rise/fall, because in the traditional method it is focused on individual items rather than the hole basked of goods.

    4)Food and oil is excluded from the core CPI because these items are highly volatile and most of our income is spend on it. It is not taken into account because it would lead to and inaccurate value.

  31. sminarovicon 25 Apr 2013 at 5:44 pm

    Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    The Bureau of Labor Statistics weights different items based on which items are typically bought the most. Either from the total units bought of a good or the total money spent on the good. These items that are most important to a household are grouped into a “basket” on which the CPI is based.

    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The CPI can show if there is inflation or deflation in a country’s economy and by how much prices are increasing or decreasing. This is very important for governments to know so that they can then make changes to stabilize the inflation or deflation.

    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    If the price of one product drastically increases or decreases, the CPI will also increase and so the inflation rate will seem to increase even though the prices of other products may stay the same as before.

    Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    Because food and oil prices are very susceptible to price swings which does not actually show inflation.

    #nwarner
    Do you think then that the CPI may change consumer confidence which will then cause a shift in aggregate demand?

  32. Sebastian Changon 25 Apr 2013 at 6:27 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    The Bureau of Labor Statistics weight different items included in the measure of the Consumer Price Index (CPI) because consumers spend their income a different portion of their income on different types of items. In order to determine an accurate value for the inflation, it is necessary to place weights on different types of goods according to their importance in the average consumer’s income. The greater the weight on a particular type of good, the higher the portion of average consumer’s income is spent on that type of good (i.e. the greater the importance in the average consumer’s income). In a Consumer Price Index (CPI), transportation, housing, and household type of goods would tend to have a greater weight than others as a high proportion of the average consumer income is spend on those types of goods.

    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The Consumer Price Index (CPI) is used to represent the average price changes for goods and services that consumers tend to purchase (although the method and calculations used actually only represent a “basket” of goods). It can be used to help the consumers to make adjustments to their cost of living (if necessary), and may help the government to decide on the appropriate taxes changes. We care about changes in the price level in an economy because it directly affects us (the consumers). For example, if there is an inflation of goods and services (i.e the price levels for goods and services in an economy increases) in an economy, this would mean that the real purchasing power (real value of one’s money) will decrease as it would be relatively more expensive to maintain our current standard of living.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    One shortcoming of the traditional method used for measuring the inflation rate using CPI would be the inaccuracies in the CPI representations and data. Specifically, the fact that the CPI only represents the change in average price for a selected “basket” of goods and services that are mainly consumed by the typical household, and it does not represent every household.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    The BLS decided to exclude oil and food prices from it “core CPI” figure because they believe that oil and food prices create a “price swing problem” which makes it very inaccurate to include said products in the measurements of the CPI. In other words, the BLS believes that the prices of oil and food are too volatile and too unpredictable to be included since it would then cause inaccuracies in their CPI figures.

    Comment on #hteoh’s response

    Great Response! I definitely agree that excluding oil and food prices would diminish the inaccuracies in the CPI figures. Personally, I believe that other goods and services such as gold may also cause a “price swing problem” since the price of gold frequently fluctuates according to the economic condition. What other goods and services do you think should be excluded from the “core CPI” figures?

  33. xhuanfon 25 Apr 2013 at 11:36 pm

    Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    Because there are goods and services that are more important than other goods in people’s life. For example, the change of house price will be more important than the change of jewelry price, since house is more necessary. People spend more money on some goods than others, so the different goods should be weighted differently. Some important goods and services are rent, food, clothes and gas.
    What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    The major purpose of CPI is to measure inflation rate and avoid inflation. Government can make policies according to CPI, for example, adjust the cost of living, social security and taxes. We care about the changes of the price level because it influence our standard of living, and it also decide how much we should get for wage and how much we should pay for tax.
    What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The price of one particular good might rise due to some non-inflation reason, for example a shift of consumption habit. The sudden rise of price of one good can drive up CPI pretty high, but that doesn’t represent a rise in average price. The price of other goods actually didn’t change.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    Food and oil prices tend to have big relative price swings that are not caused by inflation, The food and oil prices might change rapidly while the price of other goods didn’t actually change. If these price changes are measured in CPI then the inflation rate would be accurate.

    # sminarovic

    I really like your answer and I think the CPI is important to the government since they can make policies based on this. They could adjust the cost of living, taxes and social security.

  34. jduplessison 26 Apr 2013 at 10:47 am

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    Different items are weighted according to how much money the average person spends on the good. For example a persons rent should be higher than the money spent on jewelry .
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price in an economy?
    The CPI figure is important as it is used to calculate the cost of living. The amount of money people get from social security and how much tax one needs to pay.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    CPI does not account for changes in the demand of a specific good. The price for one good might spike but this is not inflation. It’s called relative price change.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    They decided to exclude food and oil prices because these goods are the most likely to have price swings.

    # xhuanf
    Why do you think food and oil prices would change so rapidly?

    # Csaba
    I agree, the rise and fall of prices over a short term makes the results inaccurate.

  35. edubison 26 Apr 2013 at 4:01 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    The BLS weights different items in the CPI differently based on the amount of a households income spent on the specific items. The goods that get a greater weight typically include rent and food and drinks.
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    The CPI figure serves as a sign to let us know that inflation is occurring. Changes in the price level of an economy affect all people and determine cost of living.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    Over a short period of time especially, a relative price change may be confused for inflation. CPI can change because of price swings and CPI is more reliable when statistics are looked over a number of years.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    Food and oil prices are subject to large relative price swings, and so were excluded from the BLS’s “core CPI” figure.

  36. edubison 26 Apr 2013 at 4:05 pm

    #xhuanf
    It is true that there are some goods more important than other goods in a persons life, but the BLS weights different items included by the consumer price index because a different proportion of the households income is spent on the different items.

  37. ykim3on 26 Apr 2013 at 10:03 pm

    1. BLS weights differently according to the income spent on the products. It shows thats that the higher income spending on a production the weight becomes grear. Therefore, spending can be very important factor on measuring the BLS.
    2. The CPI figure is a some kind of a sign to show that inflation is happening. Increase or decrease in the price level of an economy affects all people and their living standards.
    3. If prices rapidly increases or decreases, the number of CPI will also increase and also the inflation will increase.
    4. It is because they can have price swings. They can be changed rapidly more than any other goods.

    #edubis
    I like your answers. I was confused with number 2 but your answer helped me out. Good job.

  38. hkimon 26 Apr 2013 at 11:01 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    The Bureau of Labor Statistics weight different items included in the measure of the consumer price index because that shows how much of people’s incomes goes to a certain good or service. Most likely things like Housing/Rents will get more weight than entertainment and clothing.
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    CPI allows the government to make changes in the costs of living, make adjustments to the social security benefits and alter the amount of tax to pay. Most importantly it allows governments to observe patterns in inflations over the months to predict the overall prices of goods and services. We care about the changes in the price level in an economy because that may have a really big impact on our lives. For example, if a worker lives in a city 1 hour away by car from his company and suddenly one day the price of oil nearly triples, he is going to have a really hard time. It is highly unlikely that he will quit going to his job so that will mean he will have to pay for the oil and that is going to impact his spendings. Like this example, these inflation patterns will have impact on our everyday lives.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    CPI has one main limit which is that the spending habits are not able to be measured. Spending habits may differ each month so we cannot assume that they are the same all throughout the year. Also it takes lots of time and effort to collect this large amount of data.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    The BLS decided to exclude oil and food prices from its “core CPI” figure because they are easily affected by price swings so they are too much fluctuations.

  39. hkimon 26 Apr 2013 at 11:06 pm

    #stak

    Hey! Great job with your answers! I have to say that they were really high quality answers. The word choice was not too difficult (which is good because it is easier to understand) but it explained everything that you needed to. Oh and I also liked how you mentioned that CPI requires lots of effort, money, and time. Good job! 🙂

  40. jaimejaime8on 30 Apr 2013 at 1:13 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?

    The Bureau of Labor Statistics weights different items included in the measure of the consumer price index based on the different amount of income spent on the such items, the higher the income spent, the greater the weight. Rent, food and drinks are examples of products that get a greater weight.

    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The CPI figure serves us to spot when inflation is occurring. Changes in the price level of an economy determine the costs of living for that economy’s area.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?

    In short time periods, a change in price may confuse some people to believe inflation is taking place. CPI is way more reliable when statistics are studied for longer periods of time.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    This was due to the fact that these two goods are “victims” of large and quick price changes and thus were excluded.

  41. bdesslegnon 15 May 2013 at 9:54 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets a greater weights than others?
    The Bureau needs to weight different items included in the measure of the consumer price index, to help it represent their importance in the average consumer’s income. Goods that take up more of a person’s income will get greater weight that goods that do not.
    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
    The three things mentioned in the video were
    – Cost of living—through the CPI we might be able to deduce the rise in price levels, i.e. loss of purchasing power , therefore jobs may increase wage rates and such.
    – Social security—the government will keep in mind the purchasing power of the money it used to give, therefore again increasing social security as inflation hits.
    – Taxes – taxes may be reduced in response to inflation as well
    In general, the CPI helps in making future adjustments to better face a future with inflation.
    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    There may be change in consumption habits, as in the case of the video with the tea that was of high demand. So, the simple shift to a substitute might cause the rise in price as the demand increases for that item. Therefore, the CPI will not just reflect inflation.
    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?
    That is because they are volatile in their price changes and it may not necessarily be because of inflation.

  42. bdesslegnon 15 May 2013 at 10:01 pm

    # jaimejaime8
    Good responses. But more detail on your answer to the second question would have made it better, you could mention, things mentioned in the video such as its use for adjustments of taxes and social security payments.

  43. mchastanet2on 21 May 2013 at 6:54 pm

    1. Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets greater weights than others?

    Because some goods are used much more than others and therefor take up a larger amount of people income. They have a bigger weight in the calculation of the CIP. For example the weight of a house rent is much higher than the weight of the clothing as people tend to spend more for they’re rent than for the clothes.

    2. What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?

    The CPI is a measure for the inflation rate. It gives us the changes in price in an economy, so the problems the inflation is causing. We care about the price level because with it you can plan and anticipate for the future. Knowing the price level allows people to know what they can able to buy with the wages they have. It helps companies to know the demand for their goods.

    3. What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
    The traditional method doesn’t acknowledge the fact that there can be an increase in the price of a single good or service. The example given was that the price of tea rising caused increases the CIP to increase by 10%.

    4. Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

    Because the prices for these goods change a lot and very rapidly. This affects a lot consumer decision. This would cause a massive impact on the consumer price index making the results not that reliable and true.

  44. mchastanet2on 21 May 2013 at 7:01 pm

    # bdesslegn

    Hey ! I think you gave perfect answers to the questions. They are short and precise.
    I aggree with you that what could cause food and oil price to change could be due to other substitutes and not due to inflation.

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