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The Consumer Price Index:

A Way to Compare Prices in


Different Years

What is Inflation?
Inflation is the decline in the value of
money in relation to the goods that it can
buy.
The periodic increase in the cost of living.

Inflation Rate
The inflation rate is defined as the
percentage change in the annual CPI.
Suppose that you earned $30,000 in 1995.
How much did you need to earn to maintain
the same standard of living next year?

Example
CPI 1996 CPI 1995
Change in CPI 1995 to 1996 = ---------------------------- x 100%
CPI 1995
156.9 152.4
Change in CPI 1995 to 1996 = -------------------- x 100%
152.4
Change in CPI 1995 to 1996 = 3.0%

Buying Power
How is the buying power of $1.00
measured?
How can we compare prices of items in
different years?
ANSWER: Use of price indices.

Components of the CPI(U)

Housing
Transportation
Food
Energy
Medical Care
Apparel and Upkeep
Other

41.4%
17.8%
16.2%
8.2%
6.4%
6.1%
3.9%

Consumer Price Index


Source:BureauofLaborStatistics
(www.bls.gov)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001

CPI
130.7
136.2
140.3
144.5
148.2
152.4
156.9
160.5
163.0
166.6
172.2
177.1

Constant Dollar Formula


The formula for converting a price from one
year to another year.
Price in constant year A dollars
= Price in year B dollars

Constant Dollar Formula


Think of A as the later year.
Think of B as the earlier year.

Example
A worker earned $10,000 in 1967 and
$14,000 in 1975. The average CPI 1967
was 100, CPI for 1975 was 161.2.

100.0
Constant Dollars 1967 = $14,000 x -------
161.2
An income of $14,000 in 1975 dollars was
worth only $8,685 in 1967 dollars.