By Ben Rooney, January 15, 2010
This article, by Ben Rooney, reports on the raise of consumer prices in 2009 due to rapidly increasing gasoline prices. According to the article, gasoline prices rose over 50% in 2009. Because of this increase, the Consumer Price Index rose 2.7% over the last twelve months. Economist's are not worried because the core CPI, an index they watch more closely because it does not include food and energy prices, only raised 1.8% over the last twelve months, which is the same increase experienced in 2008.
In the last month of December, the core CPI raised 0.1%, which is what economists expected for the month. They said the prices were "held in check" by the housing market, which by now everyone realizes is over-supplied. Besides housing, food and energy are raising in price at the highest rate since 1982, according to Mark Vitner, an economist at Wells-Fargo.
-Paul Murphey
http://money.cnn.com/2010/01/15/news/economy/consumer_prices_december/index.htm
Prof. Skosples - would you know of a reason why food prices dropped .5% when just last year they rose 5.9%? The article said this is the first decline since 1961 - are there any historical similarities?
ReplyDeleteBrianna Buck
When excluding the “volatile” prices of housing, food and energy the level of inflation as indicated from the CPI appear to be on the rise. This sounds promising but shouldn’t economists look at the prices of these essentials like food and energy as a good indicator of price inflation? This article is saying that CPI tells all because the prices of housing, food and energy don’t have as large an influence on it.
ReplyDeleteBrianna,
ReplyDeletethere are several reasons that could explain a drop in food prices on a year-to-year basis.
1. A decrease in economic activity worldwide has decreased demand for all good and services, food including. Think of Christmas parties that firms typically have. Well, those were substantially cut this year which would lower demand for food.
2. Since gasoline was cheap last year, some farmers might have decided to plant more corn for eating rather than corn for ethanol fuel. Moreover, good harvests could have brought more food to the market. In both cases, supply would increase, which would reduce price in the market.
3. It is also plausible that people have substituted consumption away from gourmet food (meat) to more modest food (corn/beans). If that happened, it would decrease price of gourmet foods and increase price of staple food. However, when CPI is calculated, the basket is kept constant while prices change. Since people used to buy more gourmet foods before, gourmet food would carry a larger share of the overall basket than is really the case. If the presumption that price of gourmet food has decreased is correct, that would lower the CPI, but in reality that is not the case (the opposite of the substitution effect overestimating the effect of inflation).
Hope this helps.