Using CPI to Adjust for Inflation - Video Tutorials & Practice Problems

Using CPI to Adjust for Inflation

So we can also use the C. P. I. To see what different wages or prices were at different points in time. So we can take a price in the past and see what what that price is today. Using the CPI. I. Let's go ahead and check out how we do that. So remember the C. P. I. We calculated as a basket of goods right? We're saying we could buy 10 apples and 100 oranges, right? This is the basket of goods. Well if we were buying those 10 apples and 100 oranges, let's say in 1990 for I don't know 50 bucks. But now today it costs us 100 bucks. Well we could say that the fifth in 1990 has the same purchasing power as 100 bucks today. Right? Because we're ending up with the same goods were still ending up with 10 apples and 100 oranges regardless of what point in time it was and what it cost us. So that's the whole thing with the C. P. I. Is it's measuring purchasing power right? Because we're ending up with that same basket of goods. So we can use this formula to convert uh year dollars from a previous year to the current year. So we can say some price in the past. What is that price in today's dollars. So what we're gonna do is to calculate the amount in the current year dollars, we'll take the amount in the year T dollars. So whatever year that was and we're gonna multiply it notice we're gonna using our C. P. I. S. Here C. P. I. In the current year divided by the C. P. I. In that year. T. Okay so let's go ahead and apply this formula. You'll see how useful it is once we're doing an example here, okay we can use it for all sorts of things and we'll do that here. So let me leave that on the screen. So let's go through the example. Billy the millennial and gen X. Johnny are caught in a heated dispute. Billy! The millennial exclaims, my student loans are enormous. I can barely afford to go to college gen X. Johnny Harley reports, you make me sick. Your generation is so lazy back in 1975. I worked my way through college, making fun $4 an hour at my part time job at a movie theater, you just want everything handed to you for free. Not only that when I left college I worked my butt off 40 hours a week for just $14,000 annual salary and purchased my three bedroom home for $42,000. Your generation will never have the work ethic that I put in. So knowing that the C. P. I was 53.8 in 1975 and 2 40 2016 calculate the following. So we're gonna do A. Together and then I want you guys to try B. And C. Here to try and apply this formula. Alright so let's go ahead and calculate gen X. Johnny's part time wage in $2016. So told us that gen x johnny was working for $4 an hour at his part time job at the movie theater back in 1975. Right? So if we want to know what is that worth today in $2016 well in $2016 let me do current year dollars are gonna equal. So we're gonna take the $4 an hour he was making and then we're gonna use our C. P. I. So we need our C. P. I. In 1975 and R. C. P. I. In 2016 to do this conversion here. Okay so the $4 in 1975 we're gonna multiply it by today's CPI I. Of 240 divided by the C. P. I. In the past. Right? In C. P. I. For time T. So we took the amount in year T. Which is $4 times the C. P. I. In the current year, which is the numerator here to 40 divided by 53.8. So let's go ahead and see what gen X. Johnny's. Let me get out of the way here. What gen x johnny's um part time wage was in today's dollars. So we'll do four times 2 40 divided by 53.8. And we're gonna get a wage of $17.84 per hour. Right? So this means that Gen x Johnny's uh part time wage in 1975 was the equivalent of making $17.84 an hour. And I don't know about you, but I don't know any movie theater willing to pay you $17.84 an hour in today's dollars. But if you find one, hey, let me know. I could, I could use some free popcorn. Alright, so let's go ahead and pause. Here. I want you guys to try and calculate B and C. Here, let's find out his annual salary in today's dollars and the price of the home that he bought, that three bedroom house that he bought with all his hard earned money. Cool, let's do that in B and C. And let's do it in the next video.

Using CPI to Adjust for Inflation

Alright let's see how you guys did calculating gen x johnny's annual salary and gen x johnny's home price in $2016. So let's go ahead and we'll do it down here. So this was a right here that we calculated his part time wage. Let's go ahead and calculate we'll do it down here part B. We'll do his annual salary. So his annual salary, Let's see what it is in $2016. So he was making $14,000 an hour in his annual salary outside of just out of college. So we'll take that 14,000 from 1975 and we'll multiply it by today's C. P. I. Of 2 40 in 2016, divided by the 1975 C. P. I. Of 53.8. Let's go ahead and see what that's worth today. So 14,000 Times 2 40 divided by 53.8. It tells us that his wage right out of college was 62,000 $453.53. That's a pretty good starting wage out of college. I would say 62,000 straight out of college annual salary. $14,000 is the equivalent of 62,000 in $2016. Let's go ahead and find that home price. So he bought a three bedroom home in 1975 for $42,000. So three bedroom home, It was $42,000. And again notice we're using the same calculation, right, we're taking that number, that what it was worth in 1975. Let's see what it's worth in 2016. So we're gonna do 2, 40 Divided by 53.8. And let's see what that one's worth 42,000 times to 40, divided by 53.8. It gives us a three bedroom home for 187,000 360 and 60 cents. So that's actually a pretty good price at least here in Miami. I would say if you found a three bedroom home for that price here in Miami, it's a pretty good steel right there. Alright. So that is how we would calculate what those prices were in 2019 $75 and adjust them for inflation to see what their purchasing power is in today's dollars. Cool. So I actually use some pretty realistic numbers in this question. So every time you hear, hey you millennials are so lazy, you got some math to back it up now too. Alright, let's go ahead and move on to the next problem.