When is an apple not just an apple?

The BLS and the inflation rate

I, like most economists, look to the Bureau of Labor Statistics (BLS) for pricing and employment information.

Why do they do that?

If we can’t measure something, we can’t decide if it’s a problem or not. Or how big the problem is. We focus on growth, unemployment, and inflation when studying the economy.

Starting in 1915, the job of the BLS was to collect information on labor market activity and prices from manufacturing firms. The BLS released the first estimates of the current unemployment rate and the Current Price Index (CPI) in the late 1940s. Using the CPI, the BLS calculates the inflation rate.

How does the BLS calculate inflation?

Calculating the inflation rate is a two-step process. First the BLS has to estimate the price index. Then they compare the price index from one period to another period, usually a year, to determine how much prices have changed, if at all.

Computing the price index requires a lot of workers to gather data on prices for different items. Charles Wheelan has a delightful description of the travails of one BLS agent in his book, Naked Money. [1] A male BLS agent kept going back to the women’s intimates department of a well-known store. He would look over the labels and prices of women’s undergarments. Store security got suspicious and pulled him aside. Once he proved that he was a BLS agent and explained his job, to gather information (prices, materials) about women’s intimates at this store, security let him go.

Let’s delve a little deeper into the process using apples instead of women’s intimates.

To the BLS, an apple isn’t just an apple. (🍎 or 🍏)

There are 2500 different types of apples grown in the United States, with about 100 commonly sold. My usual choice is Granny Smith. But is a Granny Smith sold at the Publix in Covington, GA the same as a Granny Smith sold at the Albertsons in Lewiston, ID? Are they about the same size and quality? Are the prices the same?

What the BLS Agents who collect this data need to do is compare apples to apples, specifically one type of apple sold in a particular store to the same type sold in the same store. Then they collect the prices. The same goes for other goods, like a white cotton blouse in size 14 and an F-150 base model truck in black.

It also applies to the prices of services like a Spicy Deluxe Chicken Sandwiches prepared and served at the Chick-fil-A in Covington, GA and the price of a round-trip business class airline ticket on Delta from Atlanta to NewYork City. We collect the prices for each type of good because you can’t compare apples to white cotton blouses or F-150 base models. Or to chicken sandwiches made by someone else and airline tickets.

The price tells us something about a good’s value. Apples have lower prices than cotton blouses, which have lower prices than plane tickets, which have lower prices than Ford trucks. We can multiply the prices by the quantities sold for all items to find the value of the market basket. Then we can compare the value of the market basket to a base year value, always 100, to compute the price index.

Fortunately, the BLS does that for us.

It’s easy enough for us to calculate the price index for two or three items over two or three years.

But the BLS uses 80,000 (!) items in its market basket.

Another problem is that while a Granny Smith apple in 2024 will be like a Granny Smith apple in 1984, an F150 truck in 2024 is nothing like the F150 of 1984. It has different materials and is put together by electronic arms, rather than by people. [2]

Also, the goods we bought in the 1980s are different from what we buy now. I remember we got a gift of “The Dream of the Blue Turtles” by Sting on CD in 1985. [3] We didn’t even own a CD player yet—it was a gentle reminder to buy one. Now our computers don’t have DVD/CD player access and we have to download our music (after paying for it) via mp3 to our phones and playlists.

My husband and I also remember black and white TV and those huge TVs with 19” screens. (We’re late boomers.) Maybe you remember VCRs? What about cassette players and recorders? Or a world without smartphones and iPads? That was in 2005. The CPI accounts for changes in the market basket.

Okay, but what about inflation?

[Those with math allergies beware: some wonky numbers and a calculation ahead.]

We want to know the inflation rate. The percentage change in the CPI gives us the inflation rate. [4] We can track the CPI over time. Remember, we need a base year which has to be set to 100. If you look at the CPI data on the St Louis Federal Reserve’s FRED site, you’ll find that 1980 to 1982 is the base.

Here are some of those numbers: In April 2022 the CPI was 289.109, while in April 2023 the CPI was 303.363, and in April 2024 the CPI was 313.548. We can use those numbers to compute the year over year inflation rates for April 2023 and April 2024.  For example, the year-over-year inflation rate from April 2023 to April 2024 is the percentage change or the difference between the two (10.185) divided by the first (April 2023) and then multiplied by 100, then rounded to one decimal.

((313.548 – 303.363) / 303.363) * 100 = (10.185/303.363) * 100 = 3.357 % = 3.4 %

But we don’t need to. The BLS does that for us. Here’s what we know about post-pandemic inflation: At its peak, inflation reached 9.2 percent in June 2022.

April 2022 inflation rate: 8.3 percent

April 2023 inflation rate: 4.9 percent 

April 2024 inflation rate: 3.4 percent

The inflation rate had been rising since November 2023 with stubborn inflation in shelter prices—homes and apartments. [5] As a result, the Federal Reserve (the Fed) has pushed back the date when they are expected to reduce interest rates to the fall at the earliest. In a future post we’ll look into why the interest rate is so high and why that matters.

In the next post, I’ll return to our crash course on inflation with two posts on the causes of inflation.

Thanks for reading. I appreciate the time you’ve taken. Your comments and questions are always welcome.

Nikki

[1] Wheelan, Charles. Naked Money: A Revealing Look at Our Financial System. New York: WW Norton and Company, 2016.

[2] In the movie, Ford v. Ferrari, there is a scene from a Ford factory floor, circa 1965.

[3] Sting. The Dream of the Blue Turtles. Hal Leonard Corporation, 1985.

[4] A percentage change is the difference between two values divided by the first value and the multiplied by 100.

[5] From the BLS CPI data on US Inflation Calculator. You’ll notice the serious deflation in energy prices in May/June 2023 that led to 3.0 percent inflation in 2023.