How to Calculate Price Deflators With CPI
The Consumer Price Index (CPI) is a common measure of inflation calculated by tracking the cost of a "basket" of consumer goods over time. Price deflators refers to a less commonly-known measure of inflation, the Gross Domestic Product deflator (GDP deflator). Calculating the difference between the two becomes important in political debates over inflation-pegged Cost of Living Adjustments (COLAs) in government programs such as Social Security and in wages for public workers.
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Instructions
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Calculate purchasing power using CPI inflation numbers from the Bureau of Labor Statistics. For example, in the year 2000, the CPI was 172.2. This was an increase of 5.6 points over 1999's CPI of 166.6. When you divide the increase (5.6) by the 1999 CPI (166.6), you find the inflation rate: 3.4 percent. By this measure, you would need $103.40 in 2000 to equal the purchasing power of $100 in 1999.
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Calculate purchasing power using GDP deflator numbers from the Bureau of Economic Analysis. For example, in the year 2000, the GDP deflator was 100. This was an increase of 2.12 over 1999's GDP deflator of 97.88. When you divide the increase (2.12) by the 1999 GDP deflator (97.88), you find the inflation rate: 2.2 percent. By this measure, you would need only $102.20 in 2000 to equal the purchasing power of $100 in 1999.
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Compare the two values. To date, the CPI consistently generates a slightly higher inflation rate and dollar value (more present-day purchasing power). However, this situation may change in the future. Pegging COLAs to the GDP deflator would result in fewer dollars paid to Social Security recipients and employees over this period.
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