Consumer Price Index

“ So, when you spend $3,000 on computer gear today, you are in fact only spending half as much as was spent back in '79 for the Konan drive. . .you are really only spending $1,500 from 1979. . .due to changes in the value of the dollar as per an assortment of Consumer Price Index figures [none of which is in agreement with any of the others, so you are encouraged a bit to look up additional information on the subject. These figures [below] are presented only to provide a continuum to make comparisons. ”

“ It is manifest, however, that that which produces the increase of consumption is a decrease not in duty, but in price. It is of no practical importance to the consumer how this price is made up, and it is only in its tendency to lower the price, or, what is the same thing, to improve the quality, or increase the facility of purchase, that the diminution in duty concerns him. ”

“ The measure of price change should 274 be the movement of the index number of prices of all the important commodities produced within the country—the index number to be so weighted as to give a defined importance (50 per cent. was suggested) to the prices of those classes of foodstuffs, clothing, housing accommodation, and other commodities upon which the wage earners spend a very great part of their income. ”

“ The object of the method of index numbers is to average away the variations due to the special conditions of supply and demand of particular commodities, and to obtain a resultant which measures the effect on prices of general causes, such as the supply of currency.
It is found in practice that the necessity for restricting price quotations to those of commodities for which the same grade and quality is in the market in large quantities through a long period of years restricts the choice greatly, and limits it to raw materials or articles in an elementary state of manufacture. ”

“ The system becomes less arbitrary if we use, as the unit for measuring any goods, not the unit in which it is commonly sold, but the amount which constitutes a "dollar's worth" at some particular year called the base year. Then every price, in the base year, is one dollar, and therefore the average of all prices in that year is also one dollar. For any other year the average price (i.e. the average of the prices of the newly chosen units which in the base year were worth a dollar) will be the index number representing the price level, while the number of such units will be the volume of trade. ”

“ Selection of the Index Number. A weighted arithmetical index number for wholesale prices of commodities should be used. Wholesale prices are more prompt to indicate what change in the dollar's weight is needed than retail prices. The frequency of calculation should probably be about once every two months to afford full time for the lag between the previous adjustment and its effect.
4. Selection of the Par. This should be left to a judicial commission. Probably we should start off the system at a price level near that existing at the time. ”

“ On the whole, the best form of index number is that expressing the price of a given bill of goods. If a definite assortment of goods cost $1.00 at one date and $1.10 at another date, these figures may be regarded as index
Fig. 2. Price Movements as Calculated by Using Different Numbers of Commodities (after Wesley Clair Mitchell)
Showing that the percentage rise or fall of the level of wholesale prices in the United States is very much the same whether many or few commodities are included in the calculations. ”

“ The present index number of the United States Bureau of Labor Statistics, as perfected by the present Chief of the Bureau, Dr. Royal Meeker, is made up from the wholesale prices of 300 commodities. It gives more weight to the more important commodities, as measured by the amounts marketed in the last census year. It expresses the price level of 1914 by the index number 100 as compared with the price level of 1913 taken as 100. ”

“ We can, by index numbers based on these price statistics, translate from gold into commodities, but as yet we cannot translate from commodities into any ideal or absolute standard.
If I were treating of the problem of an ideal standard of value, I think I should be inclined to agree with Professor Marshall that a standard that represents a gradually descending scale of prices to keep pace with the "real" cheapening improvements in industrial processes is better than one which represents an absolute constancy of prices. ”

“ VIII.68 The legitimacy of separating the study of price levels from that of prices will be clearly recognized, when it is seen that individual prices cannot be fully determined by supply and demand, money cost of production, etc., without surreptitiously introducing the price level itself. We can scarcely overemphasize the fact that the "supply and demand" or the "cost of production" of goods in terms of money do not and cannot completely determine prices. Each phrase, fully expressed, already implies money. There is always hidden somewhere the assumption of a general price level. ”

“ But retail price, the price paid by the actual consumer, seems to feel very slowly and imperfectly the effect of competition; and when competition does exist, it often, instead of lowering prices, merely divides the gains of the high price among a greater number of dealers. Hence it is that, of the price paid by the consumer, so large a proportion is absorbed by the gains of retailers; and any one who inquires into the amount which reaches the hands of those who made the things he buys, will often be astonished at its smallness. ”

“ If trade unions seek to raise prices of labor while trusts raise prices of commodities, the general level of everything may rise or fall; but it can rise only by a general decrease in the quantities of commodities, labor, etc., sold, or by an increase of currency, or by an increase in velocities of circulation. If there is neither an increase nor decrease in volume of business, and if the quantity and velocity of circulation of money and its substitutes remain unchanged, the price level cannot change. ”

“ IV.13 The first cause of the unhealthy increase in trade lies in the fact that prices, like interest, lag behind their full adjustment and have to be pushed up, so to speak, by increased purchases. This is especially true in cases where the original impetus came from an increase in money. The surplus money is first expended at nearly the old price level, but its continued expenditure gradually raises prices. In the meantime the volume of purchases will be somewhat greater than it would have been had prices risen more promptly. ”

“ Each "supply curve" or "demand curve" rests upon the unconscious assumption of a price level already existing. Although the curves relate to a commodity, they relate to it only as compared with money. A price is a ratio of exchange between the commodity and money. The money side of each exchange must never be forgotten nor the fact that money already stands in the mind of the purchaser for a general purchasing power. ”

“ In considering the influence affecting individual prices we say that an increase in supply lowers prices, but an increase in demand raises them. But in considering the influences affecting price levels we enter upon an entirely different set of concepts, and must not confuse the proposition that an increase in the trade (the Q's) tends to lower the price level, with the proposition that an increase in supply tends to lower an individual price. Trade (the Q's) is not supply—in fact is no more to be associated with supply than with demand. ”

“ The [Pg 151] manufacturer knows the cost of his products and charges his price. The farmer usually does not know the cost, and in general he makes no selling price; the prices of his staple produce are made for him.
That the producer does not secure his proportionate share of the selling price in many products is a matter of the commonest knowledge, and much study has been made of the question. If the question is put in another way, the consumer pays too great a margin, in great numbers of cases, over the cost of production. ”

“ To hold the line against inflation, the government implemented strict monitoring of prime commodities, and improvement in the marketing and distribution system to protect consumers from undue price increases and supply shortages. ”

“ When a single small country is under consideration, it is therefore preferable to say that the quantity of money in that country is determined by the universal price level, rather than to say that its level of prices is determined by the quantity of money within its borders. ”

“ Rates being so adjusted upon a commodity as to enable it to move with profit to the shipper, whatever the conditions of the market, reducing the rates as the market declines, only increasing them as the market improves, a particular increase is reasonable if it be shown that the percentage of increase has been greater in the price of the commodity than in the rates on it. ”

“ As the money-prices of all her other commodities have risen, the money-incomes of all her producers have increased. This is no advantage to them in buying from each other, because the price of what they buy has risen in the same ratio with their means of paying for it: but it is an advantage to them in buying anything which has not risen, and, still more, anything which has fallen. They, therefore, benefit as consumers of cloth, not merely to the extent to which cloth has fallen, but also to the extent to which other prices have risen. ”

“ Of the three possible varieties in the influence of cheapness on demand, which is the more probable—that the demand would be increased more than the cheapness, as much as the cheapness, or less than the cheapness? This depends on the nature of the particular commodity, and on the tastes of purchasers. When the commodity is one in general request, and the fall of its price brings it within reach of a much larger class of incomes than before, the demand is often increased in a greater ratio than the fall of price, and a larger sum of money is on the whole expended in the article. ”

“ As to this even the economist can know nothing, save how the general price level has heretofore fluctuated from year to year; and that periods of rising prices have ever been followed by periods of falling prices. ”

“ Fourthly, changes in a relatively small collection of prices, particularly if foodstuff prices bulk 111 largely in the collection, are apt to be more convulsive than general price movements. They are likely to vary more than general price movements from year to year, and, indeed, from season to season. This is so, although it is true that retail prices tend to be far more stable than wholesale prices. ”

“ It follows, consequently, that there is likely to be a general rise of prices whenever there is an extension of credit for the purpose of purchasing; indeed, when money only is used to buy with, there can not be a general rise of prices, because while more money may be spent on some things, and they rise in price, there would be less money for other things, and they would rather fall in price; but when credit is used freely in addition, and increased purchases go on in all departments at once, there is apt to be a rise of prices as to all commodities and a universal spirit of speculation. ”

“ In the case of many commodities the price to the consumer was raised well above the inflationary boom prices of 1929. In many lines of goods and materials, prices got so high that buyers and builders ceased to buy or to build. ”

“ They do so in terms of Price when measured by Money; they do so in the essentials of Value when measured by comparisons of commodities. As a rule, however, Money-prices are fair guides to Commodity values. Commodity values rise and fall according to cost of production, inclusive of delivery; and in so far as Money is stable, the rise and fall in prices is evidence of variations in production cost.
The relative rise and fall in Value, be it measured by prices in Money or otherwise, is so common a phenomenon of Trade that critics might be pardoned for denying a Value level. ”

“ THE PROJECT GUTENBERG PRICE INDEX FROM 1875 TO 2010 How to use the chart, third set of examples:
This index will allow you to estimate the cost of any item in the dollars of any year included in the index.
Example: You know the cost of an item in 1900 was $1, and you want to know the cost it would have had in 1989 dollar figures [i.e. "adjusting for inflation"] . ”

“ If the demand for dollars increases faster than the number of dollars—as it did after 1800—the price of each dollar will rise and prices generally will fall. The relative value of the dollar may be changed by natural causes or by legislation. An increased supply—the demand remaining the same—or a decreased demand—the supply remaining the same—will reduce the exchangeable value of each dollar. Natural causes may act on both supply and demand; as, for instance, by increasing the product from the mines or by increasing the amount consumed in the arts. ”

“ In the case of all commodities which cannot be bought or sold at a common market place (or exchange) , price fluctuations are usually wide and frequent, because no large group ever has common knowledge of supply, demand and other factors that govern prices—purchases and sales are made direct between individuals, and knowledge of the amount asked or paid is restricted to a limited few. ”

“ It is true that retail prices usually lag behind wholesale prices; but part of the lagging is more apparent than real. Expert testimony of those who have collected such statistics shows that when, as at present, prices are rising rapidly, retailers obviate the necessity of confronting their customers with too frequent and rapid increases in prices by quoting the same prices and substituting inferior grades or, in some instances, smaller loaves or packages. ”

“ Every week new price lists are prepared so as to cover new fluctuations of cost to the retailer. And these up-to-the-minute fair price lists are given to the newspapers to print so that the consumer may be steadily informed and advised as to what he ought to pay the retailers in his city or town."
[Pg 55]
HOW FAIR PRICE LISTS ARE MADE UP
"In theory the plan is the simplest imaginable. ”