Inflation and the Index
ForestTax.com Newsletter

Inflation under Two Scales
Consumer Price Index (CPI)
& Producer Price Index (PPI)

by William E. Schlosser

The Bureau of Labor and Statistics maintains detailed information on the US economy. This information is used to to determine at what rate the US economy is growing, shrinking, inflating, or deflating. As a general trend, the US economy has been going through a long term of inflation. Since 1913, the BLS has published monthly and annual data on the economy. This data is presented in the Consumer Price Index (CPI). The CPI is a representation of what a "basket of selected goods" might cost in many urban areas of the USA. As the cost of these "basket items" increase, so does the CPI index. For instance, in 1913, these "basket of goods" might have cost a consumer $9.90. By 1950, those same goods might have cost $24.10. By the year 2000, they had risen to $169.00. While these actual numbers are not really what one would have paid for the BLS basket of goods, the analogy is accurate. We can explain this comparison by a general trend of inflation in the US economy; over time the same goods and services cost more than before.

In 1947, the BLS started publishing data on the production sector of the US economy. This index is called the Producer Price Index. The PPI is a very useful tool for estimating annual inflation rates for producers. Its uses are many and its application important to the production sector. In addition to producing this index for all producers, the BLS maintains very detailed information on many sectors of the economy. Recently, the BLS extended the Produce Price Index to include a "back dating" of the index to 1913. From this data set, we can get information on logging, lumber, and related industries. More on that later in this page.

How do we get Inflation from the index?

In order to change the data found in the index to a meaningful annual inflation rate, we have to know how to manipulate the data. If you have already been to the Finance section of this web domain then by chance you have already seen one of our investment formulae called the Present Value of a Single Sum. It looks something like this:

 
V0 = Vn / (1+i)n


If we make a few changes to this formulae we can use it to calculate our inflation in the economy. The way to do it is like this; first, I consider that Vn is our future value and V0 is our present value. We can easily exchange those for the later value in the Index and the prior value in the index, respectively. By rearranging the items and solving the equation for " i " we come up with the following:
 


Where:
f =  annual inflation rate
CPIn = Consumer Price Index at year "n"
CPI0 = Consumer Price Index at year "0"
n = interval, in years, between CPIn and CPI0
So now we are ready to try this one out on a problem from the data set.
 
Over the period 1978 to 1981, what was the average annual inflation rate, as measured by the CPI?.
If we take a look at the CPI we can see that the CPI in 1978 was 65.2 and in 1981 it was 90.9. There were 3 full years separating these measures so we are ready to make an estimate:
We interpret this number by saying, "Over the 3 year period from 1978 to 1981, inflation averaged 11.71% per year, as measured by the Consumer Price Index." In fact, this was one of the highest inflationary periods in recent US history.

Remember, inflation as presented by the CPI and PPI are expressed as annual averages. Exclusive for My-Forest.com users, we have developed this handy inflation calculator. Select the beginning and ending years from the pull down menus below and be given the inflation in the US economy as measured by both the CPI and the PPI !
 

Inflation Calculator
Select the Beginning Year and the Ending year from the pull down lists below
Beginning Year
Ending Year

Click "Calculate" and get the inflation in the US economy
CPI % Inflation per year
PPI % Inflation per year

The Consumer Price Index and the Producer Price Index are very important sets of financial time series data to Economists, even forest economists. You may need additional information to understand how the indexes are created and what they mean. You can also benefit by understanding how to use these indexes in your job to link price increases in long term contracts to the PPI or one of the specific Industry or Product indexes.

For the source of informaiton follow this link to the Bureau of Labor Statistics (click on the banner). You can also follow access specific calculations for individual industries. Called the "Producer Price Index Revision - Current Series" it presents PPI data for individual indistries, forestry included. When you click on the link, you will see 3 steps. First, select the industry, then sub industry, then request the data. You will be given monthly PPI data for the industry you requested. SIC code 2411, is Logging and logging camps. When you select this Industry, you will be given a long list of sub-industries or products. For instance, Douglas-fir is #117. If we select Douglas-fir and then "Get Data", we will see the PPI numbers for this tree species. VERY USEFUL! Give it a try ...

What is the Consumer Price Index?

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a fixed market basket of consumer goods and services. The CPI provides a way to compare what this market basket of goods and services costs this month with what the same market basket cost, say, a month or year ago. The CPI is the most widely used measure of inflation. It provides information about price changes in the Nation's economy to government, business, labor, and other private citizens, and is used by them as a guide to making economic decisions.

CPI is often used to adjust consumers' income payments, for example, Social Security; to adjust income eligibility levels for government assistance; and to automatically provide wage adjustments to millions of American workers. The CPI reflects changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but does not take into account changes in other governmental or environmental factors that affect consumers' well-being. The CPI also does not reflect the changes in buying or consumption patterns that consumers probably would make to adjust to relative price changes. For example, if the price of pork increases compared to those of other meats, shoppers might shift their purchases away from pork to beef, poultry, or fish. The ability to substitute means that the increase in the cost to consumers of maintaining their level of well-being tends to be somewhat less than the increase in the cost of the mix of goods and services they previously purchase. The current CPI only measures the cost of purchasing the same market basket of items, in the same fixed proportions (or weights) month after month.

The CPI reflects spending patterns for each of two population groups: All Urban Consumers (CPI-U) and Urban Wage Earners and Clerical Workers (CPI-W). The CPI-U 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 persons, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of persons living in rural non-metropolitan areas, farm families, persons in the Armed Forces, and those in institutions, such as prisons and mental hospitals.

The CPI-W is based on the expenditures of households that are included in the CPI-U definition that also meet two requirements: more than one-half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. The CPI-W's population represents about 32 percent of the total U.S. population and is a subset, or part, of the CPI-U's population

How is the Consumer Price Index interpreted?

An index is a tool that simplifies the measurement of movements in a numerical series. Most of the specific CPI indexes have a 1982-84 reference base. That is, the Bureau of Labor and Statistics (BLS) sets the average index level (representing the average price level) for the 36-month period covering the years 1982, 1983, and 1984 equal to 100. The Bureau measures changes in relation to that figure. An index of 110, for example, means there has been a 10-percent increase in price since the reference period; similarly an index of 90 means a 10-percent decrease. Movements of the index from one date to another can be expressed as changes in index points (simply, the difference between index levels), but it is more useful to express the movements as percent changes. This is because index points are affected by the level of the index in relation to its reference period, while percent changes are not.
 

Actual CPI & PPI Data
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