Basket Full of Goodies

Flickr Creative Commons via s11ver

The Consumer Price Index for June was released today, telling us that some things we bought last month were more expensive than they used to be. I blogged about what the numbers mean for us in Chicago today on Medill Money Mavens.

The CPI considers the average price for a basket of goods and services bought by households across the country. Inside the hypothetical basket are prices we care about, like what it costs to pay rent, fill up our gas tanks and buy beer on Saturday night.

The CPI always reminds me of a cartoon I saw on Rocky and Bullwinkle as a kid, where the Big Bad Wolf steals the basket that Little Red Riding Hood is taking to her grandmother. Unfortunately for him, it’s a volatile basket that explodes violently every time he says the words “Basket full of… BOOM… goodies.”

One of the “goodies” we get with the CPI is an idea of how much inflation is growing on the dollar. We can compare today’s basket with the price of a basket a year ago to tell if our money buys more or less than it did last June. Last month, the price of gasoline grew more significantly than other sectors.

When the Federal Reserve looks at the CPI to see if  inflation is growing, it removes the volatile stuff from the basket,  like energy and food prices. They fluctuate too much, just like gasoline did in June. If the Fed thinks inflation is getting higher than about 2 percent, they might raise the target interest rates to push it down.

The small rise in prices in June doesn’t necessarily mean inflation is taking off and economists don’t see the Fed raising interest rates any time soon, but it could mean that prices– and the economy– are beginning to stabilize.

This entry was posted on Wednesday, July 15th, 2009 at 3:04 pm and is filed under Recessioncents, indicators. You can follow any responses to this entry through the RSS 2.0 feed.