The Economy and You #14: CPI and Inflation
In previous articles, I wrote about a national Consumer Price Index (CPI) that represents the spending patterns and I described how the data collected by the Bureau of Labor Statistics (BLS) calculates a regional CPI as well. Still, CPI data can be used to measure inflation between two time periods as well as determine past and future dollar value.
To calculate the rate of inflation between two time periods, calculate the percent change in the appropriate CPI index from the first period to the second period. Here is a simple example. Let’s say that the CPI for the Milwaukee-Racine area for 2005 is 172.6 and the CPI for 2010 is 186.3. The change in the CPI index is 13.7 (186.3-172.6=13.7). To compute the percentage change we take the change and divide it by the original CPI index number and multiply by 100. So the percent change would be 13.7 divided by 172.6 multiplied by 100, or 7.94%.
Now if you want to know what $100 in 2001 would be worth today, you will take the current CPI index, divide it by the 2001 CPI index and multiply by 100. For example if the 2001 CPI was 156.4 and the 2011 CPI index is 189.1, then $100 in 2001 would be worth $120.91 [(189.1/156.4) x 100 = 120.91].
To calculate the future dollar value into present day dollars, we make a similar calculation. If we the example that the 2011 CPI index is 189.1 and the forecasted CPI index in 2021 is 208.4, we will be able to estimate that $100 in 2011 will be worth $90.74 in 2021 because 189.1 divided by 208.4 multiplied by 100 will equal 90.74.
So as I described in my first CPI article, the CPI affects nearly all Americans because of the many ways it is used. Most use the CPI as an economic indicator by measuring the average change over time in the prices paid by consumers for a market basket of consumer goods and services. Still, the CPI can also be used as a means of adjusting dollar values (future or past) so people can find out what a dollar today is worth 10 years in the future, or what a dollar 3 years ago is worth today. The consumer price index has many uses and will continue to be used as a measure of the health of our economy.
- The Economy and You: What is the Consumer Price Index (CPI)? (wistatetreasury.wordpress.com)