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Wednesday, August 17, 2005
Adjusting for Inflation (A Discussion of Comparing Data)
By Dr. Steven Taylor @ 12:39 pm

It has been noted (although in my opinion, not enough) that while oil prices are at record levels in nominal dollars, they are not at record highs historically.

At any rate, such statements have the Misanthrope at Toner Mishap a tad annoyed (imagine that ;) ):

It does not seem that we should compare products based on an adjusted for inflation index unless everything is based similarly. We can’t adjust our pay checks for inflation. Adjust my home for inflation and it’s worth $2 million, but you say my home value is current. So are the gas prices. They have not stayed stagnant. My salary is current, adjust it for inflation and I should be making something akin to a poor mid-level executive. Adjusted for inflation seems a bogus yard stick.

To risk getting on Misanthrope’s bad side (he is a regular reader here), I have to correct his assessment. While I am not an economist (although I was an economics major for two whole quarters in college), I do know something about political economy and specifically I know about analytical comparisons of data. If one wishes to make comparisons over time of economic statistics in specific currency amounts (as well as other metrics) one has to adjust for inflation.

To see what I mean, one can check out a nifty resource at Economic History Resources: What is its Relative Value in U.S. Dollars?. Not only does it note that comparing the value of money over time is difficult, it has some calculators to aid in such comparisons. For example, using just CPI (i.e., inflation), the 1980 equivalent of $40,000 today was $17,903.88. So a guy making $40k today isn’t hurt as much paying $2.50/gallon as a person making $17k was paying $1.5/gallon. Indeed, $2.5o in 2003 dollars was worth $5.59 in 1980 dollars. In other words, what we are paying now would have cost $5.59 then.

By way of another example, here’s a list of movie ticket prices adjusted for inflation, where we see that paying $.07 in 1903 was like paying $6.40 in 2005.

Inflation adjustment does matter greatly in making these comparisons.

The funny thing is that I have had the opposite reaction to Mr. M: I get annoyed every time it is noted on tv, the radio or in print that oil prices are “at record highs” without noting the inflation issue. There is no doubt that the oil prices spikes in the 1970s and early 1980s were far more significant to the general economy than the current spike.

This is not to say that the current spike isn’t significant; it is. And it affects me personally the university is 38ish miles from my house one-way and my kids just started going to school across town (although they do ride the bus in the morning).

Update: correction made to first sentence as per error noted by Sean Hackbarth in the comments.

Filed under: US Politics, The Economy | |Send TrackBack

Cinerati linked with Economics...Games...Movies...and Comic Books
Unlocked Wordhoard linked with On his bad side

5 Comments »

  1. Thank you for your explanation.

    How do we explain the fact that the oil companies are swimming in profits? Did gas not go up in price over the years (apparently not enough)? Now, if they are adjusting for inflation for all these years of “neglect�? will it not seriously hurt the economy? And, why now are they adjusting their prices?

    Comment by The Misanthrope — Wednesday, August 17, 2005 @ 1:16 pm

  2. I need to offer this correction: “real” means its been adjusted for inflation. “Nominal” is then not adusted. Therefore writing, “while oil prices are at record levels in real dollars, they are not at record highs historically” is redundant. You meant “nominal.”

    Comment by Sean Hackbarth — Wednesday, August 17, 2005 @ 6:20 pm

  3. Sean,

    That’s my sloppiness. Thanks for noting and will fix.

    Comment by Dr. Steven Taylor — Wednesday, August 17, 2005 @ 6:33 pm

  4. On his bad side

    Though I haven’t got any comment on the substance of this post at Poliblog, I was amused by this line:

    “To risk getting on Misanthrope’s bad side…”

    Don’t worry about getting on Misanthrope’s bad side. Unless he is incorrectly named, …

    Trackback by Unlocked Wordhoard — Thursday, August 18, 2005 @ 9:05 am

  5. Economics…Games…Movies…and Comic Books

    I also wanted to point out that while RPGs are expensive, they are trust me, that they are not more expensive than they were in the past. Now thanks to Poliblogger I have some supporting evidence.

    Trackback by Cinerati — Thursday, August 18, 2005 @ 8:48 pm

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