HomeMy WebLinkAboutFIN 2022-07-25 Handout Distributed at Meeting - Consumer Price Index (CPI) DiscussionCity of Tukwila
Allan Ekberg, Mayor
INFORMATIONAL MEMORANDUM
TO: Finance and Governance Committee
FROM: Vicky Carlsen, Finance Director
CC: Mayor Ekberg
DATE: July 25, 2022
SUBJECT: Consumer Price Index Discussion
ISSUE
Provide background information on the Consumer Price Index (CPI) and the effects of
inflation on households and the City. It is difficult to find local information from the early
1980's but is provided when possible.
DISCUSSION
Consumer Price Index (CPI)
CPI is the consumer price index that measures the average change in prices over time
that consumers pay for goods and services. It is a fixed set of products and services
whose price is evaluated on a regular basis and is used to track inflation. Items tracked
and evaluated include basic food like cereal, milk, and coffee as well as housing costs,
furniture, clothing, transportation, and medical care. The goods and services tracked
reflect the spending habits of two population groups. It includes urban wage earners and
clerical workers, and these two groups represent about 93% of the total US population.
Populations that are not tracked are people living in rural and agricultural households, the
military, and people living in institutions like prisons. CPI is the average change, which
means that some goods and services show a year over year increase above CPI and
others increased at a lower rate.
On July 13th, we were notified that CPI was 9.5%. The last time CPI was this high was
in 1981. What follows below is a discussion of the effects of CPI today compared to
how CPI affects households and the City the last time CPI was this high.
Not only is CPI much higher than in the past, but the 12 -month change in many categories
that effect residents, businesses, and the City have increased sharply in the last 12
months. The graph on the next page shows selected expenditure categories and the 12 -
month change.
INFORMATIONAL MEMO
Page 2
12 -month change,
June 2021 - June 2022
Fuel oils and other fuels 70.4%
Motor fuel (including gas of all types)
Natural gas
Electricity 13.7%
New vehicles 11.4%
Food 10.4%
Household furnishings and supplies 10.2%
All Items 9.1%
Transporation services 8.8%
Used vehicles 7.1%
Shelter 5.6%
Apparel 5.2%
Medical care services 4.8%
Recreation services 4.7%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
(Selected statistics pulled from U.S. Bureau of Labor Statistics)
38.4%
60.2%
Drivers of Inflation
It is difficult to explain the factors causing high inflation in the early 1980's without
providing perspective from the decade before.
High inflation in the 1980's was precipitated by 12 years of steadily increasing inflation,
worsening recession, unemployment, volatile energy and gas prices, supply shortages,
and increased Consumer Price Index (CPI) for essential items especially gas/energy,
food, and medical care.
High inflation in 2022 had a shorter lead in period which began in early 2020 with the
COVID-19 Global Pandemic which caused a recession, supply chain interruptions,
increased gas prices, increased consumer demand, an influx of cash into the economy
from pandemic relief payouts, and increased CPI.
Drivers of Inflation
Recession
1980: The economy had been in a deep recession since the mid -
1970's that continued into the early 1980's.
2022: The Covid-19 Global Pandemic caused a recession in 2020.
World Conflict
1980: Vietnam War costs from the 1970's, oil embargo that caused
energy shortages, and conflict with Iran.
2022: Russian Invasion of Ukraine is causing prices to go up over
fear of future supply disruptions especially with commodities.
INFORMATIONAL MEMO
Page 3
Rapidly Rising
Energy /
Gasoline Costs
1980: Energy/gasoline volatility and shortages in 1973 & 1979 which
generated inflationary pressure on other areas.
2022: Gasoline prices increased rapidly and generated some
pressure causing other price increases including shipping costs with
increased online ordering and global economy. There have not been
energy shortages reported.
Consumer
Price Index
(CPI)
1980: Consumer Price Index at all time high (especially for energy,
gasoline, food, shelter, services, and medical care).
2022: Consumer Price Index Increased demand for goods emerged
in 2021 as pandemic lockdowns ended, shops opened, and people
were able to buy things with money saved during economic
inactivity.
Inflation Fears
1980: Inflation surges and a high fear of worsening inflation during
the 1970's and early 1980's by policymakers, businesses, and
consumers actually generated more inflation and caused a crisis in
confidence.
2022: Business and producers of goods report low overall push back
by consumers for price increases due to shortages, shipping costs,
and industries fearing future volatility.
Economic
Structures
1980: Inflation persisted through the 1970's despite a sluggish
economy. Price controls emerged. Policymakers believed that
unemployment could be permanently reduced by accepting higher
inflation. Unemployment peaked at 9% in 1975.
2022: There are no price controls, and some Federal Reserve
Districts doubt there is much the federal government can do to
reduce gasoline prices or improve supply chain problems in the short
term.
Prices / Wages
Interconnected
1980: Businesses and producers of goods, fearing an increase in
costs, increased prices. In response, Unions asked for increased
wages for workers to keep up with increases in CPI. Unemployment
was high.
2022: Economic output is above pre -pandemic levels, but
employment is below pre -pandemic levels which means that fewer
employees working harder and are producing more.
Role of Federal
Reserve
1980: The Federal Reserve changed policies that initially made
inflation worse, however, the new Federal Reserve Chairman
predicted this pattern. Inflation fell sharply from a high of 14.5%
down to 5% in 1982.
2020: The Federal Reserve continues to make interest rate changes
to regulate the economy.
INFORMATIONAL MEMO
Page 4
Increased
Government
Spending
1980: The federal government ran steadily increasing deficits since
the early 1970's due increased spending for the Vietnam War,
domestic spending was increased, and taxes were cut.
2022: The Federal Government had increased spending in response
to the Covid-19 Pandemic that began in 2020 and spurred an influx
of cash into the economy for business and consumer recovery.
(Source: US Bureau of Labor Statistics article "100 Years of Price Change: the Consumer Price Index and
the American Inflation Experience" and Federal Reserve reports including the July 2022 "Beige Book.")
Then vs. Now Inflation: 1980 and 2022
The two highest periods of United States inflation since the Civil War occurred in the early
1980's and 2022. The negative economic impacts on Washington State residents,
businesses, manufacturers, medical care, and local governments are significant. The
leading inflationary factors were similar for 1980 and 2022, however, the timelines,
historical significance, and policymaker methodologies leading up to each period differs.
Higher prices from inflation reduces the value of wages and savings which leaves
households, usually low- and middle-class households, with less spending power.
Inflation impacts people differently based upon geography, population, income,
government, housing, employment, and business sales and profits.
Cost of Living
The American dollar had an average inflation rate of 2.92% per year between 1981 and
now, which resulted in a cumulative price increase of 225.97%. $1 in 1981 is $3.26 today.
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
CPI -W urban wage earners and clerical workers, not
seasonally adjusted (NSA)
O N V CO CO 0 N V CO CO 0 N
CO CO CO CO CO N. N. N. N. N. CO CO
O) 0) 0) 0) 0) 0) 0) 0) 0) 0) 0) 0)
111111111111111111
V CO CO O N V CO CO O N V CO CO ` O N V CO CO 0
CO CO CO O) O) O) O) O) O O O O O N
0) 0) 0) 0) 0) 0) 0) 0) 0 0 0 0 0 0 0 0 0 0 0
NNNNNNNNNNN
U.S. % change year -over -year
Seattle MSA % change year -over -year
Cost of Living is the amount of money needed to sustain a certain lifestyle in a given
place. The price of goods and services varies geographically, so it's a useful calculation
INFORMATIONAL MEMO
Page 5
for determining the affordability of an area when compared to other places. Affordability
not only affects residents, but also businesses in Tukwila who consider Cost of Living an
important planning tool.
The United States National Average for Cost of Living is 100. The following table shows
how Tukwila ranks compared to the National Average. Tukwila is above the National
Average, in total. However, Tukwila is lower than the national average in both healthcare
costs and utilities. Not only is it more expensive for residents to live in Tukwila, but it also
means that it is more expensive to provide city services. The City is impacted the same
way residents are.
Tukwila cost of living is 125.1
COST OF LIVING'
Tw+uk
Cr"o eo
Ligroin
F1En3__C sIs
l„ik l i ft i a C,i
M11§ EaLUIL
1 OO=National Average
(Source: 2022 US Census American Community Survey, Bureau of Labor Statistics)
Selected Demographics for Tukwila and King County
Total Population
Tukwila's total population grew 532% between 1980 and 2022. This far exceeds King
County's growth in the same period at 79%.
In the period of April 2021 to April 2022, Tukwila's population growth was 3rd highest in
the state at 2.8% (behind 1st place Black Diamond and 2nd place North Bend). While
growth projections specific to Tukwila is unavailable, Tukwila's population is expected to
continue to grow significantly in the coming years.
King County's population growth rate is double that of the entire state of Washington and
is expected to increase in population by 5.56%. The County's Growth Management Act
(GMA) projection for population is expected to increase steadily 2022 to 2040.
INFORMATIONAL MEMO
Page 6
What this means is that Tukwila is a very different city that it was in the early 1980's.
Significantly higher residential population and many more businesses. Increases in
population lead to increased demand for City services.
kiiig County GMA Pro)ectiori and Estimate tracking
3,000,000
2:„500„0 00
.,000,00O
1,500,000
t..,iciounco
' 00,C O
"'" PepiAtitt,IQr
.wwww 317 Me l'um
j7 Nth
(Sources: 1980 US Census Report for King County data, 2020 April 2022 Washington State Office of
Financial Management for Tukwila data)
Tukwila Population Characteristics
Tukwila experienced significant growth in number of households and persons per
household, up 303% in 2022 from 1980, which increases the services required by
residents that City staff is accountable to fulfill.
Tukwila
Population
Characteristics
1980
2022
% Growth
Persons
per
Household
Population
Population
1980 - 2022
Tukwila
3,578
22,620
532%
King County
1,269,749
2,269,675
79%
(Sources: 1980 US Census Report for King County data, 2020 April 2022 Washington State Office of
Financial Management for Tukwila data)
Tukwila Population Characteristics
Tukwila experienced significant growth in number of households and persons per
household, up 303% in 2022 from 1980, which increases the services required by
residents that City staff is accountable to fulfill.
Tukwila
Population
Characteristics
Median
Age
Total # of
Households
% Increase
of
Households
by 2021
Persons
per
Household
% Increase of
Persons in
Households by
2021
1980
29.2
1,812
N.A.
1.9
N.A.
2021
36
7,302
303% More
2.76
45% More
(Sources: 1980 US Census, 2020 US Census, Current Washington State Office of Financial Management
QuickFacts.)
Effects of Inflation
Inflation affects everyone in multiple ways (positive and negative).
• Purchasing power is reduced. For governments, this means increased costs of
providing services and capital projects
• Inflates interest rates. Borrowing is more expensive
• Economic inequality is increased. The lower the wage the harder the impact.
• Increases the cost of living
• Stimulates short-term growth.
INFORMATIONAL MEMO
Page 7
• Increases asset prices.
• Downsizes effective debt
• Lowers currency valuation
Information Availability
• Data was not widely collected and tracked at most local levels until 1990 and later.
• Data specific to Tukwila, and even King County, in the 1970s' and 1980's is limited.
• Washington State information is used instead, as needed, for 1980 and 2022
comparisons.
Resources
• US Census Reports for 1980 and 2020 provided important population, resident,
and household data.
• Other Federal resources: US Bureau of Labor Statistics, US Bureau of Economic
Analysis, US Census American Community Survey, FRED: Federal Reserve
Research Center.
• Washington State Office of Financial Management (OFM) reports: Intercensal
Estimates for time periods between US Census Reports and Forecasting &
Research Division reports.
• Other Washington State resources: Employment Security Department
• King County published reports as available.
RECOMMENDATION
Discussion only