LESSON TT INFLATION ACTIVITY 17.1 How Much Did Things Cost in the “Good Old Days”? Have you ever heard your parents or grandparents say, “Back in my day, a loaf of bread only cost a nickel and a gallon of gas only cost a quarter”? How can it be that things were so much cheaper back then? Where they really cheaper? You will try to answer this question by comparing modern prices to historical prices and calculating the percent increase in prices. To do so, you will examine prices of two goods: movie tickets and a MeDonald’s Big Mac’. Calculating Percent Change in Price Percent change in price is calculated by dividing the amount of change in price by the original price and multiplying the result by 100. If the price has increased, percent change will be positive, and if the price has decreased, the percent change will be negative. The formula for calculating percent change in price: New price — Old price Price (Year 2) — Price (Year 1) x 100 x100 OR Old price Price (Year 1) Table 17.1-A: Historic Prices 1967 Price Price Price in 2012 in 1967 in 2012 Percent | Dollars (nominal | (nominal | Change in (real Goods price) price) Price price) Movie ticket $1.22 $7.92 ‘McDonald’s Big Mac® $0.45 $4.33 Complete the last column of Table 17.1-A by using the CPI Calculator at http:// www.minneapolisfed.org/index.cfm. Enter the 1967 price, select 2012, and then “calculate.” This price approximates the purchasing power of the 1967 dollar in to- day's prices—the goods and services that could be purchased for the same amount of money in 2012. 1. Which item had the largest percent increase in price? 246 THIGH SCHOOL HCONOMICS tan EDITION © COUNCH. FOR ECONOMIC EDUCATION, NEW YORK,NYINFLATION LESSON 17 ACTIVITY 17.1 (Continued) 2, What does a 500 percent increase in price from 1967 to 2012 mean? 3. Prices seem so low in 1967. Were people much better off then? What else would you need to know to draw a conclusion? Table 17.1-B: Changes in Overall Price Level Converting Grandpa's Nominal Nominal Prices: 1967 Price CPI Price | CPI | Price x (2012 Goods (1967)_| 967) | (2012) _| (2012) | CPI/1967 CPI) Movie ticket $1.22 $7.92 McDonald’s Big Mac? $0.45 $4.33 4. Go to the Minneapolis FED website: http:/Avww.minneapolisfed.org/community_ education/teacher/calc/hist1913.cfm. Find the 1967 CPI and the 2012 CPI. Enter these in Table 17.2-B. THIGH SCHOOL ECONOMICS tan EDITION ® COUNCH. FOR ECONOMIC EDUCATION, NEW YORK,NY 27LESSON TT INFLATION . How many times higher is the CPI in 2012 than the CPI in 1967? What does 2012 CPI/1967 CPI equal? Use these CPI figures to convert the 1967 nominal prices of movie tickets and Big Macs® into the real prices expressed in terms of 2012 prices. . Now that you have converted the 1967 nominal prices into 2012 prices, you can compare prices in your grandfather's day to the prices you pay today. What con- clusions can you draw about movie ticket prices over the past 35 years? What conclusions can you draw about Big Mac® prices over the past 35 years? 248INFLATION LESSON 17 ACTIVITY 17.2 The Consumer Price Index (CPI) What Is the CPI? The Bureau of Labor Statistics (BLS) collects data on prices across the United States and uses the data to compile the Consumer Price Index (CPI). The CPI is an index that is used to measure the average changes in prices paid by consumers in urban markets for a “market basket” of commonly purchased goods and servic- es. The CPI compares the combined price of the goods and services in the market basket from one month to the next. The BLS collects information about prices of goods and service in eight major categories,* which follow, with examples of goods and services in each: + FOOD AND 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) + EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories) * OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses) "NCH FOR ECONOMIC EDUCATION, NEW YORK, NY 29LESSON TT INFLATION ACTIVITY 17.2 (Continued) Working with the CPI The CPT is an index, a mathematical tool that substitutes an index level for the overall price of the market basket. All indices use a base year for easy reference (set to an index level of 100), and the CPI uses the years 1982-84 as its reference base. This means that the average price of all of the goods and services in the market basket for the years 1982, 1983, and 1984 was set equal to 100. The BLS. uses this base level to calculate changes in prices of the market basket. An index of 105 for 1985, for example, means there was a five percent increase in the price of the market basket since 1982-84. Changes in the index can be expressed as percent changes, either monthly or annually, called the inflation rate. The infla- tion rate is simply the percent change in the CPI over the reference period. Here is the formula for calculating the inflation rate (Note: Year 1 is the earliest year; for the inflation rate from 1988 to 1990, 1988 is Year 1): CPI (Year 2) — CPI (Year 1) CPI (Year 1) x 100 Calculating the Inflation Rate Using the simple percent change formula above and the annual CPIs in Table 17.2.B, it becomes possible to calculate the inflation rate between any two years. For example, the inflation rate from 1990 to 1991 was 4.2 percent: CPI (1991) - CPI (1990) (136.2 — 130.7) —<—§—— x 100 = —————_ x 100 CPI (1990) 130.7 = 5.5/130.7 x 100 = 0.420 x 100 = 4.2% Use the annual CPI data in Table 17.2-B to complete the inflation rate calcula- tions for each year in Table 17.2-A. 250 HIGHT Sc1I001, ECONOMICS Sap EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NYINFLATION LESSON 17 ACTIVITY 17.2 (Continued) Table 17.2-A: Calculating Inflation Rates Inflation Rate from Preceding CPI (Year 1) | CPI (Year 2) | Calculations Year 1995 2005 2012 1, Ifyou earned $10 an hour in 1994, how much would you have to earn in 1995 for your wage to have the same purchasing power? 2. Ifyou saved $100 in 2004, how much interest would you have to earn in order for the savings to have the same purchasing power in 2005? THIGH SCHOOL ECONOMICS tan EDITION ® COUNCH. FOR ECONOMIC EDUCATION, NEW YORK,NY 251LESSON TT INFLATION ACTIVITY 17.2 (Continued) Table 17.2-B: Annual Average CPI (1982-1984 to 2012) Year Annual Average 1982-1984 100.0* 1985 107.6 1986 109.6 1987 113.6 1988 118.3 1989 124.0 1990 130.7, 1991 136.2 1992 140.3 1993 144.5 1994 148.2 1995 152.4 1996 156.9 1997 160.5 1998 163.0 1999 166.6 2000 172.2 2001 177.1 2002 179.9 2003, 184.0 2004 188.9 2005, 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 2011 224.9 2012 229.6 2013* 233.5 *Average CPI for 1982, 1983, and 1984; base level = 100. 252 THIGH SCHOOL HCONOMICS tan EDITION © COUNCH. FOR ECONOMIC EDUCATION, NEW YORK,NY