Assignment 2: Inflation
1. Go to the U.S. Bureau of Labor Statistics Inflation data, and collect data on 2020
vs. 2021 inflation for a variety of measures (https://www.bls.gov/data/#api). I
recommend using the “top picks” to select from. Be very clear on which measure
you choose and why (there are no wrong answers to which you chose, but you
need to justify it!).
I chose to look at CPI for all urban consumers from 2020 to 2021 to get an estimate
of how the entire economy changed because of COVID. I want to look at all urban
consumers instead of wage earners as many people have been let go because of
COVID and I want to see the impact his has on CPI.
2. Explain the change in inflation between the same month in 2020 and 2021.
Provide some explanations for why this is happening.
From November 2020 to November 2021, CPI for all items in the US city average for
all urban consumers, not seasonally adjusted went from 253.826 to 273.042 (6.8%).
This increase represents the increase in the average change in prices from
November 2020 to November 2021. This increase is the largest 12 month increase
we have seen since June 1982. This large increase in CPI is due mostly to the
fluctuations in demand. In the early months of COVID, many people were in
quarantine and worried to leave the house, decreasing their demand for many items
in the economy. People were worried about what would happen and so they
decreased their economic activity. After everything settled, many people returned to
their normal spending habits, increasing demand and therefore increasing the price
of many goods in the economy.
3. Chose only one specific region (under CPI for all urban consumers), be even
more specific about what is driving the change in that area.
Energy in US city average for all urban consumers went from 198.155 in November
2020 to 256.207 in November 2021. This is a 33.3% increase. Last year, there was a
plunge in fuel prices as the demand for energy during the early months of Covid
were the lowest levels in decades. Since then, the demand has returned to normal
levels as a result of economic recovery and the onset of winter. This fluctuation in
demand is what caused the large increase in energy CPI for all urban consumers.
4. Explain the specific assumptions of the CPI measure that may be violated during
the COVID era.
During the COVID era, many buying habits have changed. The things we buy
normally are very different than what we were buying before the pandemic, which
may violate our substitution assumption. Before COVID, most people did not own a
single mask, but now it is a part of our daily wardrobe. People are more concerned
about hygiene, and this will impact the items they buy. There are new goods now
that would be included in the average consumers basket that would not have been
before the pandemic, such as masks. Also, the quality of many items involving
hygiene have increased since 2020. Many hand sanitizers, gloves, and other items
preventing the spread of germs have increased in quality since the beginning of
COVID.
5. Obtain CPI inflation data from one other country for 2020 and 2021 by month.
(Hint: easy countries are the UK and Australia. Bonus points for the most
obscure countries found.) Explain the change in inflation between the same
month in 2020 and 2021. Provide some explanations for why this is happening.
I obtained data from trading economics on Ukraine’s monthly CPI from 2020 to
2021. As seen in the chart, Ukraine’s CPI increased from 285 to 330 points from
January 2020 to 2021. This data comes from the state statistics service of Ukraine.
This change will be similar to the reasons behind the change in the United States-
demand decreased at the beginning of COVID and have rapidly increased since.
Looking at the chart, however, this change is not as significant as that in the United
States. It seems as though CPI has been increasing at a steady rate since 2017 and
has only moderately increased since then. We can see that at the beginning of 2020,
there is a somewhat steady rate of CPI around 280, where demand would have
decreased. Then, after everything started settling at the end of 2020 the CPI rapidly
increases due to increased demand.
6. Look at the most recent CPI news release for the US.
(https://www.bls.gov/news.release/pdf/cpi.pdf) Explain what the overall
change in the CPI is from the previous 12 months. Where are the swings coming
from?
Over the last 12 months, the all items index increased 7% before seasonal
adjustment. Looking at the month-by-month data, we can see these changes
coincide with the distinct waves we experienced during 2021. The CPI percent
change was higher April-June (initial when cases were decreasing) and from Oct-
Nov (after the Delta variant had hit and cases were decreasing again). This is a result
of changing demand, as when the original variant was hitting us during the early
months of 2021, demand was low and therefore so was the change in CPI.
Everything started calming down in April and October so demand began rapidly
increasing, and therefore the percent change in CPI is greater.
Submit your responses, which should include your final graphs, in PDF format to
D2L.
