What The CPI Market Basket Means For You

credit sesame BY: www.creditsesame.com WHAT THE CPI MARKET BASKET MEANS FOR YOU 2 WHAT IS THE MARKET BASKET ANYWAY? The Consumer Price Index (CPI) market basket is developed from detailed It answers the question of how much more or less it would cost at a monthly records kept by government officials who are hired to track and later time, to purchase the same goods and services that were record prices of preselected items in stores. The important role of the CPI purchased in a base period. It's goal is to allow consumers to market basket is specifically to measure inflation as experienced by purchase at today's prices, a market basket of goods and services consumers in their day-to-day living expenses. equivalent to one that they could purchase in an earlier period. THE ITEMS: HOW THEY ARE MEASURED AND WHO MEASURES THEM The CPI market basket represents the goods and services purchased for consumption CPI-W: Consumer Price Index for Urban by urban consumers. The BLS (Bureau of Labor Statistics) has classified all Wage Earners and Clerical Workers expenditure items into more than 200 categories, arranged into eight major groups. CPI-U: Consumer Price Index for All Urban Consumers CONSUMER PRICE INDEX FOR ALL URBAN CONSUMERS (OCT 2010) How to read the index: The BLS sets the average index level at 100, with 1982- 1984 as a reference base period. It then measures changes in relation to that number. An index of 200, for example, means there has been a 100-percent increase in price since the reference period. GOODS & SERVICES INDEX POINTS IN THE CPI 50 100 150 200 250 з00 350 400 FOOD & BEVERAGES: breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks HOUSING: rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture APPAREL: men's shirts and sweaters, women's dresses, jewelry TRANSPORTATION: new vehicles, airline fares, gasoline, motor vehicle insurance MEDICAL CARE: prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services RECREATION: televisions, toys, pets and pet products, sports equipment, admissions OTHER GOODS & SERVICES: tobacco and smoking products, haircuts and other personal services, funeral expenses EDUCATION & COMMUNICATION: college tuition, postage, telephone services, mput: software and accessories Consumer Products vs. The Inflation Rate: Due to inflation, the average prices of today's consumer products such as a head of lettuce ($2.99), a man's polo shirt ($39.50) and a pack of cigarettes ($5.00), have all changed each year, over the last decade. Year Perecentage Change from Previous Year Key: Price of Product 2000 2001 2002 2003 2004 2005 TANIMURA ANTLE 1.8% 2.4% 2.3% 3.2% 2.2% 3.4% $2.32 $2.39 $2.43 $2.48 $2.56 $2.62 2006 2007 2008 2009 2010 Multi-pack of romaine lettuce, not certified organic, from California 2.4% 4.0% 5.5% -0.5% 1.4% $2.68 $2.79 $2.96 $2.95 $2.99 2000 2001 2002 2003 2004 2005 -1.1% -3.1% -3.2% -3.0% -0.4% -1.2% $45.45 $44.08 $42.71 $41.47 $41.31 $40.82 2006 2007 2008 2009 2010 -1.7% -1.5% 0.6% -0.1% -0.6% Large Men's Ralph Lauren Big Pony Polo Shirt, $40.13 $39.54 $39.78 $39.74 $39.50 100% cotton 2000 2001 2002 2003 2004 2005 11.0% 7.7% 8.5% 1.6% 1.9% 5.2% $2.16 $2.33 $2.54 $2.58 $2.63 $2.78 Marlhurm 2006 2007 2008 2009 2010 3.4% 6.6% 6.2% 30.1% 6.2%% $2.88 $3.08 $3.28 $4.69 $5.00 20 pack of Marlboro cigarettes, including taxes Each month, Bureau of Labor Statistics (BLS) data collectors called economic assistants visit or call thousands of retail stores, service establishments, rental units, and doctors' offices, all over the United States, to obtain information on the prices of the thousands of items used to track and measure price changes in the CPI. Example: As an estimate, the prices of 95,00o items from 22,000 stores, and 35,0oo rental units are added together and averaged. Here's how these items are categorized: More than 80.000 items and their prices are recorded monthly. New items are selected for measurement in the Taxes are not included market basket if changes in size or quantity have occurred since the last time the items were priced. in CPI computation Example: If a price for a carton of ten eggs was obtained and tracked by BLS data collectors for an extended period of time and that same carton changed to have a dozen eggs in it a new item will have to be tracked to avoid inconsistency. The urban consumer group, which is accounted for in the CPI-U, represents about 87% of I Housing: 41.4% I Food and Beverage: 17.4% Other: 6.9% the total U.S. population. I Apparel: 6.0% I Transport: 17.0% I Entertainment: 4.4% I Medical Care: 6.9% INCLUDED IN THE CPI-U: (87%) - Almost all residents of urban or metropolitan areas - Professionals NOT INCLUDED IN THE CPI-U: (13%) - People living in rural non-metropolitan areas - Self-employed - The poor - The unemployed - Farm families - People in the Armed Forces - Retired people - People in institutions, such as prisons and mental hospitals - Urban wage earners and clerical workers HOW DOES THE MARKET BASKET IMPACT INDIVIDUALS? The percent change in the CPI market basket determines the changes in the economic inflation rate. Inflation rate or CPI yearly changes are used to adjust US resident wages, salaries, taxes and pensions. Social Security Cost-Of-Living-Adjustments, 20oo to 2011 6% Social Security: 5% Social Security benefits increase automatically if there is an increase in the Bureau of Labor Statistics' CPI. Also known as Cost-Of-Living-Adjustment (COLA), the percentages to the left show the 4% year-over-year changes in Social Security costs. 3% Bęcause there was no increase in the CPI-W from the third quarter of 2o08 to the third quarter of 2010, there will be no increase in social security for 2011. 1% 0% '00 '01 '02 "оз Do, '05 '06 '07 '08 '09 '10 '11 Income, Salary, and Wages: The CPI affects the income of about 80 million people, including 48.4 million Social Security benefi about 19.8 million food stamp recipients, and about 4.2 military and federal Civil Service retirees and survivors. Annual cost of living salary raises and adjustments are affected by the changes in inflation, which correlate with the CPI. If you're lucky enough to be at a healthy company, they may offer you a little boost to keep up with inflation. ries, Changes in CPl also affect the cost of lunches for 26.5 million children who eat lunch at school. Taxes: The CPI is used to adjust the federal income tax structure. These adjustments prevent inflation-induced increases in tax rates, an effect called "bracket creep". TAKING A CLOSER LOOK AT INFLATION: "Over the last 12 months, the index for all items less food and energy has risen o.6 percent, the smallest 12-month increase in the history of the index, which dates to 1957." - BLS.gov "Expected inflation over the next ten years is now down to 1.5 percent." - Financial Times How Often Does the Inflation One-month percent change in CPI for All Urban Consumers, Report Come Out? seasonally adjusted, Oct. 2009 - Oct. 2010 30% .25% Every month the Bureau of Labor Statistics surveys prices around the country for a basket of products and publishes the results as a .20% .15% number. That number is used to translate into .10% inflation changes. .05% .00% The Inflation rate equation: -.05% (Ending CPI - Starting CPI) / Starting CPI -.10% -.15% -.20% -.25% -30% A Closer Look at Inflation Rates Over the Past Year Oct. 2009 - Oct. 2010 0.40% 0.30% 0.20% 0.10% 0.0% -0.10% -0.20% Oct. '09 Nov. *o9 Dec. '09 Jan. 10 Feb. '10 Mar. 10 Apr. 10 May 10 June '10 July '10 Aug. 10 Sept '10 Oct 10 SOURCES: bls.gov / ssa.gov / npr.org / msn.com / ralphlauren.com Inflation Rate