Calculating Inflation in Individual Prices

If you know the prices for the same product at two different times, you can calculate the inflation rate in that price. To do so, you divide the recent price by the older price, subtract one and convert the result to a percent by moving the decimal point two places to the right and adding a percent sign (%).

For example, when I was born in 1947, the average price for a quart of whole milk was $.19. On February 17, 1999 I found it selling at Andronico’s in Berkeley for $1.15. 1.15 divided by .19 equals 6.05263. Subtracting 1 leaves 5.05263. Converting that to a percent shows a 505.263% price inflation.

Once we know the inflation rate for a given item, we can compare it to the general inflation rate as measured by the Consumer Price Index (CPI). The federal government calculates the CPI from a monthly survey of prices it conducts for a given "market basket" of goods. The result is a number that shows the change in the value of that market basket from month to month and year to year. It is this number that we use to calculate the overall value of the dollar from year to year.

The CPI for 1947 was 22.3. For 1998, it was 163. 163 divided by 22.3 is 7.30941. Subtracting 1 leaves 6.30941. Converting that to a percent shows a 630.941% change in the CPI. Since this is larger than the price inflation in milk, we can assume that other items that make up the CPI were inflating at a faster rate.

We can also determine what the price of that quart of milk should have been if it had inflated at the same rate as the CPI. To do that, we multiply the starting price by the CPI inflation rate converted back to a decimal with the 1 we subtracted added back. 7.30941 times .19 equals 1.3887879. Rounding off to the nearest penny gives us $1.39. Since I would pay $1.15 at Andronico’s, that probably means that milk producers have lost money to inflation over the past 51 years. They have to buy the same things as the rest of us, but the price they get for their product has not quite kept up. Therefore, they have a bit less to spend in real (constant) dollars than they did 51 years ago.

In the interest of accuracy, I must say that there is one problem with what I have done above. I started by comparing an actual price (Andronico’s) with a national average. I did so because the national averages for today will not be available for another year or two. It takes awhile for the government to collect, tabulate and publish all of those numbers. The national average for today’s milk price might be higher, lower or about the same as Andronico’s actual price.