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How the Consumer-Price Index Measures Inflation | WSJ - YouTube
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- [Narrator] Plane tickets,
gasoline, groceries.
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Inflation has hit the US hard.
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In 2022, the consumer price index rose
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at its fastest pace in
more than four decades.
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- So the CPI, as it's more commonly known,
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is pretty much the most
closely watched indicator
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of inflation in the US,
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and consequently, the world.
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- [Narrator] The consumer
price index estimates
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the change in prices for a basket of goods
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and services that represents
the average household spending.
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Calculations made from that basket
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are used to make decisions
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that affect Americans
all over the country.
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Decisions about adjusting tax brackets
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and benefits like Social
Security and food stamps.
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And it's one of the indexes
watched by officials
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at the Federal Reserve.
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- Against the backdrop
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of the rapidly evolving
economic environment,
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our policy has been adapting
and it will continue to do so.
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- [Narrator] But how
is this basket selected
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and used to calculate the CPI?
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And when shaping policy decisions,
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why does the Fed pay the most attention
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to a different index?
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(playful music)
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The department in charge of the index,
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the Bureau of Labor Statistics, or BLS,
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looks at several categories,
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each given a different importance
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to compute the month's percent change.
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Some of the most important categories
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are food, transportation and housing.
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- When you pull that all together,
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housing is a big, I mean,
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it's the biggest expense that
we pay for out of pocket.
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Rent, your mortgage, that's
gonna be a hefty chunk
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more than anything else.
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- [Narrator] The BLS gives
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each category its relative importance
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based on a survey of what consumers buy.
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Keeping track of all of those
items people spend money on
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and their prices changes month to month
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is the job of BLS's price checkers.
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The agency employs over 450 workers
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who track prices for up to
100,000 goods and services
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and 8,000 housing units every month
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based on the survey of what
consumers are purchasing.
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To make sure products
they are price tracking
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haven't changed, they compare the product
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to a list of data points
from the month before.
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Sometimes that list can be up to 11 pages.
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This process helps to
ensure the CPI's accuracy.
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The BLS is basing those calculations
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off of an urban consumer
paying out of pocket.
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The formula excludes non-direct spending,
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like payments from nonprofit organizations
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that provide services to households,
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Medicare and Medicaid,
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and employer-sponsored healthcare plans.
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But again, this is just an average.
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(till beeping)
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Inflation affects different
people differently.
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- How you feel inflation depends a lot
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on what's in your spending basket,
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and how that differs
from the average person's
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as captured in the CPI.
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If you have to drive to work every day,
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you are feeling inflation a lot more
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than the person who has to take the Subway
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because the gas prices
have gone up so much.
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- [Narrator] And the index
doesn't include everything.
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That's why some, like the Federal Reserve,
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prefer indexes they see as broader,
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like the Personal-Consumption Expenditures
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Price Index, or PCE.
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- Over the 12 months, in
April, total PCE prices,
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that's Personal-Consumption
Expenditures Prices rose 6.3%.
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- [Narrator] One of the reasons
the Fed prefers this index
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is that the CPI only transitions items
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in and out of the basket every two years,
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while the PCE changes
its basket month to month
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based on consumer trends.
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The variations in how CPI
and PCE are calculated mean
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that the two indexes
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can reflect American
inflation slightly differently
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but the Fed takes both into account.
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- The Fed's monetary policy actions
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are guided by our mandate to
promote maximum employment
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and stable prices for the American people.
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- [Narrator] Looking at
multiple indexes gives the Fed
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a broad picture of American inflation.
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- CPI's undoubtedly something
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that they're watching closely,
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especially the month-on-month movement,
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like that's an important
gauge of it does this,
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inflation we're seeing,
does it have momentum?
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- [Narrator] And rising
inflation of vital items,
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especially over long periods of time
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can cause more issues,
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like inflation becoming
embedded in the economy.
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- We at the Fed understand the hardships
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that high inflation is causing.
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We're strongly committed to
bringing inflation back down,
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and we're moving expeditiously to do so.
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- [Narrator] When inflation
remains high for too long,
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consumers begin to change their behavior
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in ways that can keep prices elevated.
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- So for instance, like oh,
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my bills are getting really expensive,
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so I'm gonna ask for a raise
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and then your boss is like people seem
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to be willing to pay my higher prices,
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so I'll just give this person a raise
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and raise my prices.
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That keeps inflation
kind of chugging along
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in a way that can be eventually
harmful for the economy.
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- [Narrator] By looking at
changes to individual categories,
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like housing and food,
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consumers can learn specific information
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from the overall CPI.
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- That's gonna give you a
sense of whether inflation
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is broadening, and that's
really the concern right now
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for the economy.
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- [Narrator] The CPI is a useful tool
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for economists and consumers alike.
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And it's a good indicator
of whether inflation
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will begin to subside
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or whether it will become
more embedded in the economy.
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(dramatic music)
(items beeping)
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