Calculating Inflation-Adjusted Figures

It is common for someone to want to know if his/her annual pay is keeping pace with inflation from year-to-year. An explanation of the calculation of inflation adjusted figures follows, but first listed are some of the assumptions one accept when using the U.S. Consumer Price Index for all Urban consumers (CPI-U) to prepare these estimates. Remember that changes in the CPI-U depict the U.S. average change in the cost of living for urban consumers.

Assumptions

  1. Because varying economic cycles in different areas, the CPI-U may not necessarily fit an area in the short-run; but for Utah over the long-run, the use of the CPI-U seems appropriate.
  2. The CPI-U may not necessarily represent the inflation patterns of individual budgets that may be more closely related to specific costs, such as fuel or medical supplies.

Two Alternatives

There are two different approaches to calculating inflation adjusted figures: (1) State the series in terms of most recent year's dollars, or (2) Use the beginning year of the series as the reference point. The U.S. Bureau of the Census uses the first approach to present ant compare median income figures for the past several years. The second approach is useful in determining if, for example, average or individual wages are keeping pace with inflation.

 

Reference = Most Recent Year

  • From a table of CPI-U annual averages, calculate the change between the most recent year and a preceding year (divide the newer year by the older year).
  • Then multiply the unadjusted number for that year by the ratio just calculated.

 

Example: U.S. Capita Money Income
  Current CPI-U Ratio 1992 $
1992 $15,033 140.3 1.000 $15,033
1985 $11,013 107.6 1.304 $14,360

Reference = Beginning Year

  • Calculate the relative change in the CPI-U annual averages for succeeding years compared to that year.
  • That is, divide the later year by the earlier year and post the ratio.If intervening years are not needed, merely calculate the single ratio.
  • Then divide the unadjusted number for the year by the ratio for that year.
 

Example: Utah Average Monthly Wage

  Current CPI-U Ratio 1985 $
1992 $1,801 140.3 1.304 $1,381
1985 $1,440 107.6 1.000 $1,440

Please direct questions to Senior Economist, Mark Knold, at (801) 526-9458.

Source: Utah Department of Workforce Services, Workforce Research and Analysis Division.