How to Calculate Purchasing Power With CPI

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According to the Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) is published as an index number that shows the change in the price of a defined market basket of goods and services over time from a base period that is defined as 100.0. According to BLS, the purchasing power of the consumer's dollar measures the change in the value to the consumer of goods and services that a dollar will buy at different dates. In general, the purchasing power of a currency used in a market is inversely proportional to the change in CPI, meaning if the CPI goes up, the purchasing power of the same money goes down.

Things You'll Need

  • Base year
  • Target year
  • CPI for base and target years
  • Decide on the base and target years to be used. For example, year 2000 as base and year 2009 as target.

  • Note the CPI for the base and target years. For example, 181.3 for year 2000 and 219.235 for year 2009.

  • Calculate the change in purchasing power by multiplying the ratio of base year CPI (181.3) to target year CPI (219.235) by 100. For example: (181.3/219.235) x 100 = 82.69%. This means that the purchasing power of dollar declined by 17.31% from the year 2000 to year 2009.

  • Do the equivalent dollar calculation. Multiply the ratio of target year CPI to base year CPI with the dollar amount whose equivalent needs to be computed. For example (219.235/181.3)x500 = 604.62. This means goods that could be bought for $500 in the year 2000 will require $604.62 to be bought in the year 2009 or that the purchasing power of $604.62 in the year 2009 is same as that of $500 in the year 2000.

Tips & Warnings

  • Choose the correct CPI data for accurate calculation. The CPI is published for various areas, sectors and periods.

References

  • Photo Credit graph image by Attila Toro from Fotolia.com
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