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Consumer Price Index

## Purchasing power and constant dollars

The CPI can be used to show how the purchasing power of a dollar changes over time. The purchasing power of a dollar in 2022 was about 92.6 percent of the purchasing power of a dollar in 2021. This can be calculated by dividing the CPI-U U.S. city average all items annual average index value for 2021 by the CPI-U U.S. city average all items annual average index value for 2022, as shown in table 1.

Table 1, Purchasing power comparison, percent
Quantity Representation Value

Annual average index value, December 2021

270.970

Annual average index value, December 2022

292.655

Ratio of index values

270.970 / 292.655 0.926

Ratio multiplied by 100

0.926 * 100 92.6

This means that the purchasing power of the dollar declined about 7.4 percent between 2021 and 2022 because of inflation. Or stated another way, a dollar in 2022 could only buy 92.6 percent of what it could buy, on average, in 2021. An automatic “CPI Inflation Calculator” is available online for annual comparisons of purchasing power. Similarly, one can calculate equivalent dollar amounts for any two months in different years using a ratio of those monthly indexes. For example, to determine how much money one would need in December 2022 to have the same spending power as \$500 in December 2021, multiply the dollar amount by the ratio of the CPI-U U.S. city average all items index values for December 2022 and December 2021, as shown in table 2.

Table 2, Purchasing power comparison, dollars
Quantity Representation Value

Index value, December 2022

296.797

Index value, December 2021

278.802

Ratio of index values

296.797 / 278.802 1.065

Ratio multiplied by \$500

1.065 * \$500 \$532.50

This means that a basket of goods costing \$500 in December 2021 would cost \$532.50 in December 2022.

### Constant dollars

For analysis involving long time periods, it is frequently necessary to convert current or nominal dollars into constant or real dollars. This is done by multiplying each dollar amount by a ratio of price indexes, using one year as the base, as shown below. An example conversion to constant 2010 dollars is shown in table 3.

Table 3, Constant 2010 dollars
Year Median U.S. Household Income1 Annual average index value, CPI-U U.S. city average all items index Ratio of base index value to yearly index value Ratio equals Median U.S. Household Income, constant 2010 dollars

2010

\$49,276.00 218.06 218.06 / 218.06 = 1.00 \$49,276.00

2011

\$50,054.00 224.94 218.06 / 224.94 = 0.97 \$48,552.38

2012

\$51,017.00 229.59 218.06 / 229.59 = 0.95 \$48,466.15

2013

\$53,585.00 232.96 218.06 / 232.96 = 0.94 \$50,369.90

2014

\$53,657.00 236.74 218.06 / 236.74 = 0.92 \$49,364.44

2015

\$56,516.00 237.02 218.06 / 237.02 = 0.92 \$51,994.72

2016

\$59,039.00 240.01 218.06 / 240.01 = 0.91 \$53,725.49

2017

\$61,136.00 245.12 218.06 / 245.12 = 0.89 \$54,411.04

2018

\$63,179.00 251.11 218.06 / 251.11 = 0.87 \$54,965.73

2019

\$68,703.00 255.66 218.06 / 255.66 = 0.85 \$58,397.55

2020

\$68,010.00 258.81 218.06 / 258.81 = 0.84 \$57,128.40

2021

\$70,784.00 270.97 218.06 / 270.97 = 0.80 \$56,627.20

Source: St. Louis FED, FRED database, MEHOINUSA672N

To convert the same data to constant 2021 dollars, use 2021 as the base instead, as shown in table 4.

Table 4, Constant 2021 dollars
Year Median U.S. Household Income1 Annual average index value, CPI-U U.S. city average all items index Ratio of base index value to yearly index value Ratio equals Median U.S. Household Income, constant 2021 dollars

2010

\$49,276.00 218.06 270.97 / 218.06 = 1.24 \$61,102.24

2011

\$50,054.00 224.94 270.97 / 224.94 = 1.20 \$60,064.80

2012

\$51,017.00 229.59 270.97 / 229.59 = 1.18 \$60,200.06

2013

\$53,585.00 232.96 270.97 / 232.96 = 1.16 \$62,158.60

2014

\$53,657.00 236.74 270.97 / 236.74 = 1.14 \$61,168.98

2015

\$56,516.00 237.02 270.97 / 237.02 = 1.14 \$64,428.24

2016

\$59,039.00 240.01 270.97 / 240.01 = 1.13 \$66,714.07

2017

\$61,136.00 245.12 270.97 / 245.12 = 1.11 \$67,860.96

2018

\$63,179.00 251.11 270.97 / 251.11 = 1.08 \$68,233.32

2019

\$68,703.00 255.66 270.97 / 255.66 = 1.06 \$72,825.18

2020

\$68,010.00 258.81 270.97 / 258.81 = 1.05 \$71,410.50

2021

\$70,784.00 270.97 270.97 / 270.97 = 1.00 \$70,784.00

Source: St. Louis FED, FRED database, MEHOINUSA672N

In this example, while the nominal U.S. median household income rose from \$49,276 to \$70,784 from 2010 to 2021, an increase of 43.6 percent, the growth in real U.S. median household income, after adjusting for inflation, was more modest, slightly less than 16 percent.