So often in the papers I read about a certain amount of then-money being worth a certain amount in now-money.
How do mere reporters do this calcualtion? How can I do it? How true is it? After all comparing the price of a Model A to a Honda Accord is obvioulsy foolish.
Some comedian said "My dog is worried, Alpo is up to $.70 a can, that is $4.90 in dog money.
It’s actually not terribly hard, as tables comparing various years are available in freeware programs, or can easily be calculated.
But mathematically, all you need to know is the inflation rate for each year (or you can assume an average, which is less accurate).
Example: Say you bought a car in January 1999 for $20,000. And the inflation rates for the years in between now and then are:
1999 : 4%
2000 : 3%
2001 : 2%
Then if you assume all things are equal, you can calculate the price in “today’s dollars” by the following method:
$20,000 * (1.04) * (1.03) * (1.02) = $21,852
The generalized formula is:
Purchase Price * (1 + (Year 1 Inflation/100)) * (1 + (Year 2 Inflation/100) * …
Simple. Use the inflation calculator:
http://www.westegg.com/inflation/
It’s very acurate, and fun to use.
Oh! Neato! Thank you Mr. Bites!
The point you make about quality is valid nonetheless, Paul in Saudi.
Using inflation tables over many years is problematic, though, in the sense that some things are actually cheaper due to improved production techniques and scientific advances. The percentage of a workers budget that went towards food items in 1900 was likely far higher than it is today, even though in some cases specific staples or food items are actually cheaper now.
It’s also tough to compare a Taurus with a Model T, as technologically there is no comparison. The CPI is also flawed as the ‘core’ rate is oft used for this purpose whereby “volatile food and energy prices are omitted.” Most people can’t omit food or energy from their budget. Also, “free” trade has flooded the US market with imports, a relatively recent phenomenon that distorts price comparisons badly. And, many items didn’t even exist depending on your time frame. A laptop Pentium IV wasn’t available at any price 75 years ago – nor many medications or surgical procedures.
A quick off the top of your head method is to divide the “old” money into the current gold price of ~$300 an oz. as it was the nominal value of the dollar for many years @ ~$20 an oz.
The number is quick and dirty and only a rough guide. As Tedster points out, there are many other factors besides inflation.
And it only gets much worse when you factor in changing currencies, the fact that accurate and complete records are very sparse before the income tax began, and the fact the same name in currency could mean different things in diffferent areas.
In other words, when reporters say things like X in 1800 = Y in 2002, it means they are using a researcher’s best educated guess.
Ooops:
Look in the most recent edition of “Williamsburg”. Its a magazine put out by the Colonial Williamsburg historical area organization. There is a good article about this very subject there.
When speaking about specific items, yes, adjusting for inflation over long periods of time can be problematic. It can even be problematic over short periods of time. There was an issue a year or two ago with the CPI because the Bureau of Labor Statistics did not adjust certain figures appropriately for rent for apartments with air conditioning. I believe they treated the price adjustment for airconditioning inconsistently between rentals and owned homes (for which they calculate imputed rent).
The CPI is adjusted, however, for quality improvements. Theoretically, an improvement in the average computer’s processing speed is reflected in a lower price for computers (if I recall correctly, this is a hedonistic price change). I could be mistaken about all of this.
Of course, the CPI is only one measure by which to adjust a dollar for inflation–there are many others, most notably the GDP deflator. And both types have many subcategories, so with certain items you can get more specific.
Tedster, is the percentage of a worker’s budget going to anything relevant to price changes? I would argue they are two different (though certainly related, for the worker if no one else) issues. Also, how do imports distort price comparisons badly? They certainly can have an effect on prices, but I wouldn’t say that’s a “distortion” that should be adjusted for. That’s the real world.
As with most analytical efforts, these attempts to adjust prices are not perfect, but they are valid attempts to account for the impact of inflation (and quality improvements). They’re the best we have, and they are constantly under review for improvement.
Ha! What perfect timing.
I was just reading “Roughing It” and MT talks about the Pony Express riders and the letters they carry for $5 (1860?). I was thinking about searching for a way to equate that to today’s dollars and now I know it is roughly $95 (even given the issues above).
It took them 8-9 days I think to go cross country, when FedEx can now deliver the same distance in half a day and for probably a fifth or sixth of that charge.
thanks
A few points to add:
Historians have written a lot about the subject, and, as noted, it’s very complicated. Part of the answer depends on specifying more completely what the question is. Are you interested in how available something is, or who could afford to buy it, or whether the item itself is relatively more expensive now than then. These questions would get different answers.
Among the many factors that make cost estimates difficult is that through much of human history, many goods were exchanged in trade, money didn’t necessarily enter in. The idea of inflation would be problematical, for example, discussing the consumption of medieval farmers.
Historians, when they are highly concerned about how much something costs at a certain time and in a certain place, often explicitly state a set of assumptions that apply only to that situation.
One thing to be careful about is who has drawn up the comparisons, and for what purpose. Take, for example, oil. Somebody who’s seeking to get money for exploratory drilling would probably be interested in “proving” that the price of oil has been holding up well (generally rising). Somebody who’s selling large oil-hungry cars might want to prove the opposite.
Importantly for the OP, when the popular press makes a statement about changes in the worth of money, they often don’t care much beyond making people go “wow!” And, of course, they don’t want to write stories that sound ridiculous (“The cost of automobiles has risen by 10 times since the 1960s.”), so they have to take some note of changes in inflation or buying power. These figures aren’t reliable for many intents and purposes.
I seem to recall that in The Wealth of Nations Adam Smith says if you have to sign a contrract for a very long time (say a 100 year lease) insist on payment in kind. The coin of the realm will be debased by time, but six white horses are always worth exactly six white horses.
Somehow this is realted to all the above.
That was one reason why FDR was so despised (among other things, obviously) as he suspended the gold clause, reneging on the government’s gold bonds. What was formerly payable in gold, nay, required to be paid in gold, was now payable with fancy pieces of green paper.
What we are talking about ultimately is the unit of account. A standard of some sort, not necessarily pretty, maleable rare metals, but a standard nonetheless. How would you feel if your 10 acres of land decreased in size by a half-acre every year because some politician claimed “The acre policy is too restrictive.” Or how ridiculous would it be if other measurement standards were allowed to be controlled by the government? "The US gallon lost several ounces in heavy trading against the Litre yesterday."etc.