14 posts categorized "Inflation"


Gas Prices Push Up CPI Slightly

Rising gas prices pushed up the Consumer Price Index (CPI) in October.  However, year-over year, gas prices were essentially constant.  In addition, overall inflation over the past year was still just 1.6%.

The table below shows changes in selected goods and services over the past year.  Notice that egg prices continue to drop drastically, but they make up a very small portion (0.1 %) of a typical consumer's budget.  Shelter (housing) prices rose 3.5% in the past year and these account for about a third (33.4%) of a typical consumers spending.   This continues the trend that began in 2010, following the decline in housing prices in the wake of the Great Recession.

CPI Table 1016




College Students Need Macroeconomics Principles

Should we ditch macroeconomics or perhaps reduce it to two weeks?  In a recent blog post, Noah Smith argues that most of the material in a Principles of Macroeconomics class isn’t really necessary.  After teaching macro principles to more than 1,000 students per year since 2003, it is easy for me to find the blind spots in Noah’s view.  More than anything, it is pretty clear that Noah doesn’t spend much time with college students. 

Let me start with what Noah gets right: students should learn the Solow model for long-run growth, and the AD-AS model for business cycle analysis.  He also includes “the standard Milton Friedman, New Keynesian, AD-AS, accelerationist Phillips Curve theory of monetary policy.”

Now we come to Noah’s first howler: he believes that this material should take “about two weeks.”  Two?  What students is he teaching?  I teach at the University of Virginia, a really great university with super students.  But this takes six weeks, not two. When my students show up for macro principles, very few even know that interest rates are market prices.  I do teach the Solow model but most Macro principles instructors believe it is just too hard for the intro level. 

More than that, Noah leaves out a host of other macro topics that students need to learn at the intro level, whether they continue in economics or not.  This list includes:

1. Key macroeconomic variables.  These need to be defined, explained, and put in their proper historical perspective.  These include real GDP growth, unemployment, inflation, and interest rates.  And not just for the United States.

First off, the way we measure these variables actually matters.  Consider that unemployment rates do not include underemployed or out-of-labor force workers.  Or that GDP only includes market goods.  Both of these are relevant for policy and have been discussed in the media recently.  And historical perspective is really key here – it can be one of the best gifts you can give your students. What is a big number or a small number?  When unemployment is 7%, is that high or low?  How about in the U.S. versus Spain?  Or when real GDP grows by 4%, is that high or low?  How about the U.S. versus Mainland China?  Most college students won’t know this without a macro principles course.

2. The loanable funds market. You can’t understand financial collapse/contagion without a good understanding of the loanable funds market.  A big part of this discussion is also forming an intuitive understanding of interest rates, which is not natural for most students.  In my principles course (and textbook) I even cover mortgage-backed securities, securitization and moral hazard now so that the students understand the Great Recession.

3. Fiscal and monetary policy. In many universities, this is the one place where real economic policy is taught - Intermediate Macroeconomics typically focuses on theoretical models.  I view these policy discussions as voter education curriculum.  Students need to know what deficits mean and something about historical perspective here too.  They also need to know where government revenue comes from and how it is spent.  Hint: it’s not all spent on foreign aid and welfare!  And what about the Fed? This is the course where students learn about Fed policy and both actual and perceived effects on the economy. 

If time permits, it is great to also throw in international trade and finance, like the balance of payments (many misconceptions arise from a misunderstanding of how capital inflows are related to merchandise trade). 

Basically, to cover all of this takes about a semester.  It is foolish to think that two weeks is enough.

By the way, my favorite macro textbook covers all of these topics clearly in a great one-semester format.


Consumer Prices Completely Flat Year-over-Year

Consumer prices dropped overall in September, according to the latest BLS estimate of the Consumer Price Index (CPI).  The CPI fell by 0.2 %, taking the index back down to the level where it was one year ago.  Think about that: many prices have risen over the past year, but the typical U.S. consumer pays the same amount for goods and services today that she did one year ago.

CPI Graph September 15

The main reason for the decline is decreasing gas prices - again. Gas prices fell by almost 30% in September. In contrast, the food index actually increased by 0.4 %.

Core CPI (the CPI index for all items except than food and energy) is helpful for some applications because it is less volatile.  This measure rose by 0.2 percent.

Basic supply and demand explains the falling price of gasoline why the costs of gasoline. New discoveries of oil and new oil extraction techniques (think fracking) have greatly increased the supply of gasoline, shifting the supply curve outwards and reducing the price of crude oil in world markets. 

The table below shows the one-year price change for selected items, along with the weight given in the CPI index. Remember that the weight is determined as the portion of the typical consumer's budget dedicated to that spending category.  For example, a typical U.S. consumer allocates 3.97 % of their monthly spending toward gasoline.  

CPI table Sep 15

Notice how many food item prices rose significantly (egg prices up another 36 percent!), but gasoline prices fell almost 30 percent.  Television and personal computer prices continue their decades-long slide downward.


Year-over-year CPI Edges up

For the first time since last December, the CPI is above it's level from twelve months earlier.  The latest CPI estimates from the Bureau of Labor Statistics show an increase of 0.3% in June, and 0.1% over the year. 

The graph below shows 12-month CPI changes since 2006.
CPI June 2015
In fact, 2015 has seen gasoline prices on quite a roller-coaster ride  - decreasing by by 18.7 % in January, increasing by 10.4% in May, and by 3.4 % in June. Given the large volatility  food and energy, core CPI is calculated omitting those prices - and core CPI increased by 1.8 % over the past twelve months.
The food index rose by 0.3 % in June, which may not seem that much - but some individual foods have experienced significant price rises. Let's hope you put more than eggs in your shopping basket, because eggs have experienced their largest increase since August 1973, up 18.3% in June alone. This egg price spike the product of simple supply and demand economics: the avian flu has caused a chicken shortage.
The table below lists some examples of prices that moved positively and negatively over the past twelve months.

Price Table June 2015



CPI up for First Time since October

According to the BLS, the CPI increased by 0.2% in February on a seasonally adjusted basis. This is the first increase after a consecutive decline in the last three months. The index was unchanged over the last twelve months. Hence, the ups and downs in the last twelve months have evened out, so that we are at the same price level again that we had in February 2014.
  CPI Graph 03-24-2015
Generally, the increase in the price level last month can be attributed to the sudden increase in gas prices. After a series of declines, the index for gasoline rose for the first time since July. The change from December to January was -18.7%, while the change from January to February was +2.4 percent.
The food index also increased by 0.1 percent. However, the results for the past month were mixed. Even though in increased on average, three of six major grocery store group indices declined, while the other three increased.
In the table below you can find the percentage of popular items in the last twelve months. If you compare the table to the same table from last month, you will notice that the growth in price is broad-based.
CPI Table 03-24-2015


Deflation Continues

The latest Consumer Price Index (CPI) estimates, released this morning by the BLS, indicate that the CPI fell 0.7% in January.  This marks the third consecutive month that the overall price level has fallen.  In addition, this latest decline means that the CPI is now down for the twelve months ending in January. This decrease brings us down to the price level from December 2013.

CPI graph 02-26-15

A big part of the decrease can be attributed to falling gasoline prices. The core CPI, which excludes volatile items like food or gas, actually rose by 0.2% in January and by 1.6% within the last 12 months.

The table below lists changes a selected group of specific price categories along with their weight in the CPI.  Since gas prices are about 4% of a typical consumer budget, they influence the overall price level more than other individual good prices. 

CPI table 02-26-15


More Deflation in December

Last week, the BLS released the Consumer Price Index (CPI) for December 2014. Overall, the CPI dropped 0.4 percent in December, largely driven by the 9.4% drop in gasoline prices. Core CPI, which excludes food and energy prices was flat during December.

The graph below shows one year growth rates in the seasonally adjusted CPI series.  Over the last twelve months the CPI increased just 0.66 percent, down from 1.23% the month before.

Screen Shot 2015-01-16 at 8.42.13 AM


The large decline is still mainly due to decreasing energy prices, including gasoline and oil. The energy index fell by 10.6 percent in the past year. Perhaps cold weather could stem this decline by increasing the demand for energy.

But while gas prices are falling, food prices are moving in the opposite direction. Food prices climbed by 3.4% last year, their largest annual increase in three years.

The table below shows the price change for selected goods and services in the past twelve months:

CPI Table 1214


  • Maybe you should buy your butter now.  The price of butter is still climbing quickly, rising "only" 22.5% in December, down from the 29.8% increase in October.
  • Textbook prices rose at 5 percent.  So that what a student could get for $150 last year, now costs $157.5.  Perhaps the new textbooks are better than the old ones.
  • The price change of hot dogs doubled. In November the increase was only at 6.0%, but in December, it was 12.1 percent.


Gas Prices Drops Lead to Overall Deflation in November

Gasoline prices dropped another 6.6% in November, bringing the year-over-year decline to 10.5 percent.  And since the average U.S. consumer spends almost five percent of their budget on gasoline alone, the price drop helped pull the overall consumer price index (CPI) down by 0.3% in November. 
In the past year, inflation, as measured by growth in the the CPI, has been just 1.3%.

Screen Shot 2014-12-17 at 8.42.30 AM

We can dig further into the price report to see changes in prices of particular goods.  For example, the price of cookies increased by 1.8% in November. However, the price of flour and prepared flour mixes declined by 2.7%, so you might consider baking your own cookies.

As usual, I also give you a few selected goods that have had both significant price rises and significant price falls (in the table below).

Inflation 12-17-14

According to the Energy Information Administration, the national average gas price is now at its lowest level since December 2008.  That certainly makes it cheaper to drive home for the holidays.




Inflation Stays Flat in October

Inflation seems to be firmly in check, according to the October CPI News Release from the Bureau of Labor Statistics.  Overall, the CPI was flat in October and up just 1.7% in the past year. 

Screen Shot 2014-11-20 at 8.44.45 AM

Even though the overall price level has been relatively stable over the past year, there have been several wild swings in individual prices - some positive and some negative.  For example:

  • Even though gas prices are declining, that doesn’t mean that electricity bills are too. Electricity prices climbed 3.1% in the past year while gas prices fell 5% over the same period.
  • Not all protein is the same: The price for chicken remained constant within the past twelve month, while egg increased by 6.7%, and ground beef by 18.6%.
  • Comparing prices of apples and oranges? It’s possible but it shows they are different. Apple prices decreased by 0.5% while orange prices increased by 9.6%.
  • Booking airline tickets in advance doesn’t always have to be cheaper. The price index for airline fares declined by 2.08% within the past year.
  • The omnipresence of streaming services like Netflix might explain why the price for DVDs decreased by 8.5% in the past year. Interestingly though their price increased by 2% in the past month.

The table below offers examples of price changes over the past year from big price drops to big price rises.

 CPI Table 1014


Some Prices up, but Still No Inflation Overall

The overall consumer price index increased by 1.7% over the 12 months ending in September.  For September only, prices rose by just 0.1 percent. Interestingly, the same increases are true when food and energy price changes are excluded from the calculation.
But even though overall prices rose by 1.7% over the past year, some categories rose much more and some categories even fell.  The table below summarizes some of the categories where prices changed significantly over the past year, along with some categories that tend to be important to college students.  The third column in the table shows the relative weight assigned to the given category in the calculation of the CPI.  This value indicates the portion of a typical consumer's monthly expenditures allocated to that category.
CPI Table 0914
Notice how:
  • Ground beef prices rose 17.2% in the past year.  No wonder so many are turning into vegetarians.
  • Gasoline prices continue to fall, dropping 3.6% in the past year.  I mentioned this on Twitter last week, citing a Wall Street Journal article.
  • Textbook prices rose 5.1% and college tuition and fees are up 3.4%
  • Women's outerwear prices rose by 11.3% but men's suits and coats prices increased by just 2%


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Principles of Macroeconomics

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