The Recession's Effects on the CPI
Customers noticing a rise in the price of their favorite cheese or soy milk may be observing trends recorded in the consumer price index. During economic upswings and recessions, the CPI has a tendency to change as well. In the case of the recession that developed as a result of the mortgage meltdown that started in 2007, this event caused a few changes in the CPI.
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Identification
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The consumer price index is a compilation of the prices for goods and services. The Bureau of Labor Statistics collects a wide variety of items to get a holistic picture of price fluctuations. According to its website, a sample of the items included in the CPI are grocery items, such as coffee and breakfast cereal, housing, transportation, sewage charges, jewelry, toys, pet products, funeral expenses and college tuition. Changes in these prices reflect broader economic trends, such as inflation and the effect of monetary policies.
Inflation
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How the CPI changes throughout a recession depends, in part, on the policies of the Federal Reserve. The Fed and the Bureau of Labor Statistics use changes in the CPI to track the presence of inflation. When prices of goods and services rise, this means the economy is experiencing inflation. If the Fed grows concerned about rising prices, the chairman raises interest rates. Raising interest rates contracts the money supply. When less money is in circulation, prices drop and, in turn, the CPI dips lower. On the other hand, a low CPI signals that the Fed can reduce interest rates without fearing inflationary consequences.
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CPI and the Recession
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Prices have remained stable during the recession: The CPI shows no radical jumps despite the Fed's keeping interest rates at near zero percent. During 2009 and 2010, the Fed feared deflation or, decreasing prices. However, a March 2011 Reuters report comments on the CPI's rise above analyst expectations: Though interest rate strategist for Credit Suiss, Eric Van Nostrand, doesn't view this rise as indicative of hyperinflation, Nostrand explains that the Fed may start keeping an eye on interest-rate policies as they affect inflation. Indeed, the sustained low interest rates and infusion of cash into the U.S. economy incite rising prices.
Considerations
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the CPI generally remains low during recessions and rises during economic boom times. During a recession, prices -- and thus, the CPI -- typically remain low because few people have money to purchase goods and services. Therefore, businesses lower prices to attract customers. Many Fed chairmen -- including Ben Bernanke -- believe the best way to boost employment and economic activity is by lowering interest rates. However, a consequence of lowering interest rates is devaluing the dollar. When the dollar becomes cheaper, foreign countries buy more oil and agricultural commodities: This translates to higher oil and food prices for Americans. In sum, the CPI might remain low during the recession, but the Fed's solutions to jump starting the economy typically force prices, and therefore the CPI, to go higher. When the economy recovers and people have more money to spend, businesses raise prices, and consequently, the CPI rises.
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References
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