County Executive  |  Economic Indicators -- US Price Indices Rise Little
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   Albemarle County, Virginia

October 31, 2010     

Quarterly Economic Indicators

U.S. PRICE INDICES RISE LITTLE

The U.S. Consumer Price Index (CPI) and the Implicit Price Deflator (IPD) for state and local governments rose slightly between FY 10 Q1 and FY 11 Q1.  The increase in CPI came to 1.18%, while the rise in the IPD equaled 1.85%.  The year-over-year increases in these indices seem to reflect a diminished prospect of price deflation. Potential price deflation has motivated the U.S. Federal Reserve to keep nudge interest rates to historically low levels, in order to stimulate demand for goods and services.

Although CPI and the IPD both measure changes in prices, the two indices track price changes in two different market baskets of goods and services.  The Consumer Price Index pertains to goods and services that households are likely to purchase, while the Implicit Price Deflator pertains to goods and services that state and local governments are likely to purchase.  Households, for example, might buy items such as diapers, and barber services, while state and local governments are more likely to buy things such as police radios and traffic lights.  Clearly, there exists some overlap between the two market baskets; households, as well as state and local governments, buy products such as personal computers, pens, and motor vehicles. 

The differences that exist in the two sets of market baskets, however, typically generate numbers that do not coincide with each other, especially in the long run.  As shown on the graph, IPD increased by only slightly more than did the CPI between FY 10 Q1 and FY 11 Q1.  At first glance this situation would seem to suggest that the two price indices move pretty much in tandem over time, but the cumulative impact of differences in annual rates of change can render large long-term gaps between CPI and IPD price levels.  Between FY 06 Q1 and FY 11 Q1, for example, CPI increased by 10.9% while IPD for state and local government rose by 18.2%, or at a rate that was about 67% higher than Consumer Price Index’s rate of growth. 

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