Consumer Price Index continued

With the consumer price index we’re able to compare prices and salaries from year to year.

Let’s say your grandmother made $15,000 per year in 1964 and your mother makes $37,000 per year in 2010 and you want to know if your grandmother made more or less than your mother. You can convert grandma’s actual $15,000 salary to 2010 Constant Dollars and see if it’s higher or lower than your mother’s.

* New Constant Dollar SalaryNewCPI

oldsalaryOldCPI

218.1*$15,000 $105,532.26

31.0

$105532.26 $37,000

Grandma wins

Graphing

Let’s say you make $100 every year for 10 years.

YearActual Salary in

Dollars2001 1002002 1002003 1002004 1002005 1002006 1002007 1002008 1002009 1002010 100

Actual Dollar Graph

Actual vs. Constant Dollar

Since the value of the dollar decreased each year, this graph is not a realistic depiction of your salary over this period.

Constant Dollar Salary is not represented

Creating the SpreadsheetLet’s convert all of these values to 2010 constant dollarsso we can see whetherour $100 is keeping up with inflation

YearActual Salary in

dollars2001 1002002 1002003 1002004 1002005 1002006 1002007 1002008 1002009 1002010 100

To Constant Dollar 2010 Salary

To see the relative salary of 2001 in terms of 2010 dollars….

2010 CPI*2001 Salary 2001 Salary in 2010 Constant Dollars

2001 CPI

What if?

You got a 1% raise each year?Actual Dollar graph?Constant Dollar Graph?

What if?

You got a 3% raise?Actual Dollar Graph?Constant Dollar Graph?

Graphing Electricity Prices (US

city average, per KWH)

Year Price 1986 $0.0771987 $0.0791988 $0.0801989 $0.0821990 $0.0841991 $0.0871992 $0.0881993 $0.0921994 $0.0921995 $0.0941996 $0.0941997 $0.094

Has electricity become more expensive?

Actual Dollar

To Constant Dollar 1997 Price

To see the relative expense of electricity in 1986 in terms of 1997 dollars….

1997 CPI*1986 Price 1997 Constant Dollar Price

1986 CPI

  A B C D

1 Electricity Prices (US city average, per KWH)

2 1986 $0.077 109.60 =$C$13/C2*B2

3 1987 $0.079 113.60 $   0.112

4 1988 $0.080 118.30 $   0.109

5 1989 $0.082 124.00 $   0.106

6 1990 $0.084 130.70 $   0.103

7 1991 $0.087 136.20 $   0.102

8 1992 $0.088 140.30 $   0.101

9 1993 $0.092 144.50 $   0.102

10 1994 $0.092 148.20 $   0.100

11 1995 $0.094 152.40 $   0.099

12 1996 $0.094 156.90 $   0.096

13 1997 $0.094 160.50 $   0.094

Better

Scenario for Electricity

We saw what the graph looked like when the constant dollar price of Electricity went down relative to the rate of inflation.

What would the constant dollar graph look like if electricity increased at the same rate as inflation?