- Introduction to inflation
- Actual CPI-U basket of goods
- Inflation data
- Example question calculating CPI and inflation
- Deflationary spiral
- Tracking inflation
- How changes in the cost of living are measured
- How the United States and other countries experience inflation
- The confusion over inflation
- Lesson summary: Price indices and inflation
- The Consumer Price Index (CPI)
Exploring the actual weightings for the CPI-U basket of goods. Created by Sal Khan.
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- As the question above hints, these calculations seem to have been made with an assumption that consumers' preferences don't change and so that people buy the same relative amounts of different things. Am I right?(17 votes)
- It's called the base-weighted index, or Laspeyres index, and it tends to overstate inflation overtime. The latest index weighting technique is chain weighted index that changes the relative weightage of the individual items in a basket of goods periodically based on consumer data. It is the best approximation of CPI, but ultimately, no technique is perfect.(5 votes)
- I don't live in the U.S., and although a price index is used here too, we don't make the distinction between urban consumers and non-urban/rural consumers. So I've got two questions. a) Why break it up? Why make the distinction between urban and rural consumers? Do they spend their money significantly differently? b) Is their a rural counterpart to the CPI-U?(8 votes)
- Not only to urban and rural consumers spend their money on different things, they also have very different costs in some categories. Housing costs tend to increase more rapidly in urban areas than in rural areas and the reduction of communication costs is much more pronounced in urban areas than in rural areas. It is interesting to see in the video that while the cost communications in general has gone down, telephone service has not - this may be due to regulations that require telephone service providers to subsidize service in rural areas where their costs are high with profits from urban areas where their costs are low.(18 votes)
- At1:30, you make it sound like consumers are drinking a lot because they spend the same amount on fruits and vegetables as alcohol. But isn't this misleading? Fruits and vegetables are quite cheap; you can buy a lot of carrots for the price as a single beer.(11 votes)
- You're correct, it can be misleading, depending on how you think about it. I spend more on television than I do on air. That doesn't mean that I value TV more than air - it's just that you can breathe all the air you want for free!
Here's the exact definition from the BLS: "The relative importance of a component is its expenditure or value weight expressed as a percentage of all items within an area." - http://www.bls.gov/cpi/cpi_riar.htm(6 votes)
- When you say something's gotten cheaper, do you actually mean the prices have gone down or is it that people have been spending less on it than they were in the eighties?(6 votes)
- It means the price went down.
Interesting note, though. The data shows what percentage we spend now, but not then. I wish it did.(7 votes)
- How close to a city do you have to be to be considered an Urban Consumer, according to the CPI-U? Would someone living in a suburb count if they are sufficiently close to an urban center?(4 votes)
- Yes, according to http://www.bls.gov/cpi/cpifaq.htm:
The all urban consumer group represents about 87 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, farm families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals.(5 votes)
- How do you calculate CPI?(4 votes)
- firstly a basket of goods is collected from around 7000 household and after that 650 of that are selected.. and it is weighed upon the overall family expenditure..after that a price is fixed.. lastly base year is collected and and always the base year will be 100..(1 vote)
- So if the base year is 100, how do they calculate the indexes? How did they get to 226.23 for All Items in Nov 2011?(3 votes)
- The base year is just defined to be 100. It's "100%" of itself. So 226 is 126% more than the base year.(3 votes)
- What are the main price indices economists use? Are different ones preferred for different purposes?(2 votes)
- Depending on the topic, economists use CPI or GDP deflator.
CPI is issued by Bureau of Labor Statistics (bls.gov). GDP deflator is issued by Bureau of Economic Analysis (bea.gov).(3 votes)
- CPI-U is the American CPI?(2 votes)
- It is not the only version of CPI but it is the one most commonly used since it primarily includes most people in the U.S.(2 votes)
- Sal keeps saying things are "2.26 or 6.77 times as expensive" Did he mean 226.... and 677....?(2 votes)
- I believe those are two different ways of saying the same thing. You could say items are 2.26 times more expensive or you could say compared to the base index of 100 it is now 226.(1 vote)
Male voice: What I want to do in this video is explore what the actual basket of goods looks like for the consumer price index. We had a ridiculously simple example in the last video. Right over here, this is a table I got, this is from a press release issued by the Bureau of Labor Statistics. If you do a search for a CPI or a CPI-U in Bureau of Labor Statistics, you should find the press release where they issue the CPI. This is the first table in that press release. They say the Consumer Price Index for all urban consumers, and just like we talked about in the last video, when people talk about the CPI Index, they're really talking about, or they tend to be talking about, the CPI-U. The CPI for urban consumers because most consumers fall under this category. U.S. city average by expenditure category and commodity and service group. Then they define their base year. The base year, actually they have a range, maybe I guess they take an average between 1982 and 1984. They say that is 100 unless otherwise noted. What they do in this first column, so these are the different buckets that people spend, that the urban consumer might spend some of their money on. This is saying the basket of goods we're giving a weighting. About a little under 15% is spent on food and beverages. Then they break down that 15%, so 13% is on food and then they even break it out between 7% or a little under 8% is food at home. Then they break it out between cereals, meats, dairy and related products, fruits and vegetables. The average, based on the way the basket looks, it looks like they're spending about the same amount on fruits and vegetables as they're spending on alcohol. They're spending significantly less on ... Well, I don't know if that's a good trend right over there, but that's why this is interesting to look at, because this is viewed as a typical basket of goods for your average urban consumer. You can see they're spending a little bit more on meats, poultry and fish. You can see the breakdown. Then you could keep breaking it down. They're spending 41%, the basket of goods, on housing, and they even break that up in terms of some of it is your primary, some of it is your general shelter, then there's stuff like fuels and utilities. That's encapsulated in your housing, you're going to have to heat your home and whatever else. Then your furniture, 4% or 4.4% is spent on furniture. We could keep going down. This is pretty interesting to look at. The basket of goods, so this is viewed as the typical urban consumer spending 3.6% on apparel, 17% on transportation, 6.6% on medical care, and almost a similar amount on recreation. A similar amount on education. They keep breaking it down into all of the different categories. A little under 1% on tobacco and smoking products. You might say,"Wait, most people these days "in the U.S. don't smoke, but the ones who do "spend way more than this." This is an average of all of the people in the United States. For example, if one out of ten people spent 10% of their income on tobacco and the other people don't smoke at all, then you might get on average, the average basket of goods, is about 1%. They keep breaking it down into other things. All of these weightings combined, they will add to 100. That is the entire basket of goods. Now what they do, this is their weighting. This column right over here essentially gives us the weighting as of December 2010. That's going to change as people's habits change, or as new goods and services emerge on the market, or frankly even as prices change, that will change. But you have to some weighting in which to take a weight of the price changes, or to weight the average percent changes. They told us that unless otherwise noted, our base year is going to be 100. Relative to that base year, they then give us the prices, the price indices for each of these buckets in November 2011, and then December 2011. Then they're going to actually figure out the unadjusted percent change to December 2011 from. This is year over year, from December of the previous year, and this is from the previous month. You can see the change from the previous year is much larger than the change from the previous month. One way to look at this, this is saying in November 2011, food and beverages, on average, were about 2.3 times more expensive than they were between 1982 and 1984. December 2012, sorry, December 2011, they were about 2.31 times more expensive than they were in 1982-1984. Just as an extra kind of data point, they actually give us this one little line here. If we set 1967 as the base year, then all items, if we use the default base year of 1982-1984, in November 2011 all items were about 2.26 times as expensive as they were in 1982-1984. But if we use 1967 as our base year, now it's 6.77 times as expensive. Remember, the base year is equal to 100. This is 6.77 times as expensive as they were in 1967. You could go down all of the categories to essentially see these are all relative to 1982-1984, so you can see how much things have gotten more expensive. It's interesting. Things like furniture have not gotten that much more expensive relative to the early '80s. In fact, there are some categories that have even gotten cheaper. For example, new and used motor vehicles. It hasn't changed much at all since, based on at least this weighting, and they do all these adjustments based on the quality of the car. You might say, "Wait, I'm spending more on my car than I did in 1982," but they're making adjustments based on your car being that much better and all of that. It's not exactly an apples to apples comparison. But you could see that based on those adjustments, it doesn't look like it's changed much. Things like medical care have gotten a lot more expensive since the early '80s; four times as expensive, you see right over there. Video and audio has gotten cheaper. Recreation in general has not gotten that much more expensive. Information and information processing has gotten cheaper. Telephone service has not gotten that much more expensive. Communication has gotten cheaper. I don't know if you were around in the early '80s, but actually the cost to call someone long distance has gone down dramatically. Even, see, personal computers, they have gotten cheaper. Once again, like the cars, there's an adjustment for essentially ... They don't do it directly because obviously computers have gotten orders of magnitude more powerful, but they have gotten on cheaper average, and they have gotten much, much more powerful. This is fun to look at. You can see, looking right over here. Tobacco and smoking products have become dramatically more expensive. You have more and more jurisdictions that are, for the most part, taxing it or whatever. They're making it harder and harder to buy. You see things like ... It's just fun to look at. Dig around here. Medical, oh, we already looked at this. This is the overview services, durables. A lot of these things are in this one to two to three price range. The stuff like medicine, tobacco, much more expensive. Things like computers, communications, much cheaper. Then as we mentioned before, this measures the percent change to December 2011 from the previous year. That's why it gives you a year over year number. This is from the previous month. These are seasonally adjusted changes. If we have time in another video, I'll talk about how you can calculate, or I'll do a simple example, of seasonally adjusting things.