Lesson 8: Question 4

[T.B.Justin]

What does it mean to take account of inflation in constant dollars?

[Dave Killoran]

What does it mean to take account of inflation in constant dollars?

Hi T,

It means to take into account the value of the dollar after inflation has been accounted for, which then allows you to compare values from different years.

For example, let's say someone was making $100,000 in 2000, and then in 2010 they were making $125,000. Without adjusting for inflation, they've increased their salary by 25%. But, when inflation over that period is accounted for, it turns out that $100,000 in 2000 has the same buying power as $128,000 in 2010 (full disclosure: I had to look that number up here https://data.bls.gov/cgi-bin/cpicalc.pl). So, what looks like a decent raise over time actually buys you $3000 less than you were able to buy in 2000. You didn't really get a raise, you went backwards!

Good question!

[T.B.Justin]

Hey Dave,

I truly appreciate your time. I have a follow up question.

So, in this instance, prices have outpaced this person's salary increase, and with an on average 2.5% raise each year, the inflation rate between 2000-2010 must have been higher than 2.5%, thus they have less purchasing power in 2010 than they had in 2000?

[Dave Killoran]

That is exactly correct!