I often read things where it will say something like “It cost X$ in 1970, the equivalent of Y$ today”. Or the other way around. Is it tied into a single thing, like the price of gold? Or is it something more esoteric like the Federal interest rate? Do all sources figure it the same way? How accurate is it? I.E. if it is tied to the price of gold or something, can you look back and see that that was the price of a loaf of bread?
In: Economics
They take what something cost back then and multiply it by an inflation index.
Government statisticians keep track of how much a number of everyday goods and services (food, energy, clothing, transportation, cigarettes, rent, medical services, etc.) cost the average consumer over time. In general, things get more expensive as time goes on. This is “inflation” which is actually a de-valuing of currency. Using those statistics they can somewhat accurately measure the de-valuing of currency in general over a given time period.
Say last year a loaf of bread cost $1. Today it costs $1.03. That’s a 3% rate of inflation on a loaf of bread. Measure the same increase or decrease in prices among a whole host of other everyday goods and services and you come up with the current rate of inflation. Measure this over time and you will be able to calculate a compounding effect and, with reasonable accuracy, you can look back to the price of what something cost 100 years ago and estimate what buying power you would need in today’s market to buy a similar product or service.
The rate of inflation is not uniform among all goods and services. Gold is a commodity which is subject to more market influences than other goods, but there is still an inflationary element in the price of gold over time. The price of a loaf of bread over time can be more accurately measured by applying an inflation index since bread is an everyday commodity with a low value which everyone buys.
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