CPI During the Great Recession

The consumer price index is one of the leading economic indicators that help economists and helps analysts gauge the inflation rate. The consumer price index looks at the average of regular occurring purchases to help measure the inflation rate. This includes food, housing, and transportation. The CPI measures the price changes of these consumer goods and is calculated periodically. When the CPI rises, that means goods are more expensive and inflation is occurring. When the CPI lowers, goods are cheaper, and there is deflation. Businesses will adjust their wages based on the changing CPI. Although this is the most common method for measuring the inflation rate in the United States, many economists believe that it is not as accurate as other measures of inflation.

The prices of goods change depending on the forces of supply and demand. Recessions occur when there are two consecutive quarters of economic contraction, and part of this contraction comes from a reduction in spending from consumers. During the 2008 recession, there was a big drop in the CPI, which you can see in the graph below.

During the recession, people stopped consuming goods because many lost their jobs and in turn, their sources of income. This led to a decrease in demand for certain products. As people stopped buying, prices began to fall. Home prices began to drop by over 15%. Consumers changed their shopping habits during the recession. Consumers were shopping to save. They would take advantage of sales, coupons, and buy more goods in large supply. Consumers would make more trips to the grocery store, and this would reduce the price they would pay at a time. However, food prices remain fairly stable during periods of recession.

There are many reasons as to why the recession happened. One of the big factors that led to the recession was the high-risk mortgages given to people who had below average credit histories. Many of the investors who were given loans weren’t able to pay them back, and would either sell their homes in order to pay off the mortgages, or borrow more money. The housing market began to plummet and the housing bubble eventually burst, causing millions of Americans to lose their homes and their jobs.

In response to this, the Fed lowered the interest rate to help the economy and gave banks huge emergency loans. Over time, the economy has been able to recover the jobs lost during this period, but the effects of the recession will still have a long lasting effect on many people.

Sources:

1. “Consumer Price Index for All URBAN CONSUMERS: All Items in U.s. City Average.” FRED, 11 Aug. 2021, fred.stlouisfed.org/series/CPIAUCSL.
2. Team, The Investopedia. “Were There Any Periods of Major Deflation in U.s. History?” Investopedia, Investopedia, 9 June 2021, www.investopedia.com/ask/answers/040715/were-there-any-periods-major-deflation-us-history.asp.

3. “Food Shopping Behavior during the Great Recession.” NBER, www.nber.org/digest/oct15/food-shopping-behavior-during-great-recession.