Inflation FAQ’s

The following provides some of the most Frequently Asked Questions (FAQ’s) about the US Inflation Calculator, inflation, Consumer Price Index, inflation rates and more.

How does the US Inflation Calculator work?

The US Inflation Calculator measures how the buying power of the dollar has changed over the years by using the latest Bureau of Labor Statistics (BLS) inflation information provided in the Consumer Price Index (CPI).

A few examples provide a walk through of how the calculations are performed using the CPI.

Example 1:

Let’s say you spent $20 to buy some goods or services today. How much money would you have needed in 1980 to buy the same amount of goods or services?

The average CPI for 1980 = 82.4
The average CPI for 2011 = 224.9

The following formula is then used to calculate the price:

2008 Price x (1980 CPI / 2011 CPI) = 1980 Price

Using the actual numbers:

$20.00 x (82.4 /224.9) = $7.33

Example 2:

Let’s say your parents told you that in 1970 a movie ticket had a cost of 50 cents. How could you tell if movies have increased in price faster or slower than most goods and services? To convert that price into today’s dollars, use the CPI.

The average CPI for 1970 = 38.8
The average CPI for 2011 = 218.8

The following formula is then used to calculate the price:

1970 Price x (2011 CPI / 1950 CPI) = 1970 Price

Using the actual numbers:

$0.50 x (218.8/38.8) = $2.90

Today, a movie ticket in the US will usually run at least $7. The price of a movie has increased faster than other goods or services in the US.

What is inflation?

Inflation is described as continuously rising prices, or the continuous fall in value of the dollar.

What is deflation?

Deflation is the opposite of inflation — a continuous decrease in prices, or continue rise in the dollar’s value. During the Great Depression, Americans experience deflation at its worst. Prices plunged, and no one had money to spend, hire, build or do much of anything.

Deflation often reduces demand since consumer spending on good and services is greatly reduced. That in turn, can lead to increasing unemployment.

What is hyperinflation?

Very simply, hyperinflation is runaway inflation or inflation that is "out of control." The definition used by most economists is “an inflationary cycle without any tendency toward equilibrium.”

Zimbabwe’s 2008 economy is a recent example of hyperinflation. In July of 2008, $100 billion banknotes were introduced in an effort to combat severe money shortages. While huge in face value, a single note was still not enough to buy one loaf a bread.

What is a recession?

In the most simplistic terms, a recession happens when a country experiences negative growth over a period of time. Generally, an "official" recession occurs when a country’s Gross Domestic Product (GDP) declines for two or more consecutive quarters

What is a depression?

A depression occurs when a country experiences negative growth over an extended period of time, usually years.

What is the Consumer Price Index (CPI)?

The Consumer Price Index, also referenced as CPI, is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Is the CPI the best measure of inflation?

This perhaps, is best addressed by the Bureau of Labor Statistics (BLS) who creates the CPI. This is directly from their website:

Various indexes have been devised to measure different aspects of inflation. The CPI measures inflation as experienced by consumers in their day-to-day living expenses; the Producer Price Index (PPI) measures inflation at earlier stages of the production and marketing process; the Employment Cost Index (ECI) measures it in the labor market; the BLS International Price Program measures it for imports and exports; and the Gross Domestic Product Deflator (GDP Deflator) measures combine the experience with inflation of governments (Federal, State and local), businesses, and consumers. Finally, there are specialized measures, such as measures of interest rates and measures of consumers’ and business executives’ expectations of inflation.

The “best” measure of inflation for a given application depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase, at today’s prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period. The CPI also is the best measure to use to translate retail sales and hourly or weekly earnings into real or inflation-free dollars.

How are CPI prices collected?

The Bureau of Labor Statistics (BLS) has data collectors called economic assistants who are responsible for visiting or talking to various goods and services providers across the United States. According to the BLS, the economic assistants record a scientific sampling of prices on about 80,000 items (good and services). They gather, record and update the data monthly, which serves to track and measure price changes in the Consumer Price Index (CPI).

Does the CPI reflect my spending habits or experience with price change?

Not necessarily. For example, the Consumer Price Index does not include spending habits for anyone living in rural areas, those in the Armed Forces, or those in institutions, like prisons. Specifically, the CPI includes data on the spending habits of two population groups:

  • all urban (U) consumers, and
  • urban wage (W) earners and clerical workers

The Bureau of Labor Statistics (BLS) reports that the all urban consumer group represents about 87 percent of the total U.S. population.

The BLS has created two indexes that measures the all urban consumer group price change experience:

  • Consumer Price Index for All Urban Consumers (CPI-U)
  • Chained Consumer Price Index for All Urban Consumers (C-CPI-U)

Obviously, these groups and indexes represent scientific samplings, not any specific person or family.

What goods and services does the CPI include?

The BLS has created more than 200 categories for all goods and services they track. These 200 are placed within eight major groups:

  • Food and Beverages: meat, milk, beer, wine, snacks, etc.
  • Housing: rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture, etc.
  • Apparel: cloths like pants, shirts, sweaters, etc.
  • Transportation: vehicles, airline fares, gasoline, etc.
  • Medical Care: hospital services, drugs, medical supplies, glasses, etc.
  • Recreation: TV, pets, movies, pets, etc.
  • Education and Communication: college costs, telephone services, computer software, postage, etc.
  • Other: smoking products, haircuts and other personal services

The CPI does not include savings or investment items, like stocks and bonds or real estate.

For each of the more than 200 categories, the BLS has chosen several hundred specific items to track as sample points in their data.