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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?