Consumer Price Index

Question

In January 1980, the CPI stood at 77.8, and by January 2006, it was 198.3. Assume college graduates entering the job market were being paid on average $1,200 a month in 1980, and in January 2006, the average was $3,000. Are the newer graduates in 2006 paid more or less after adjusting for inflation?

Answer 1

In order to compare the average income of $1,200 in 1980 with the average income of $3,000 in January 2006, we need to convert $1,200 income to its equivalent amount in January 2006 dollars.

In January 2006 dollars, $1,200 is equal to

$1,200 X [CPI (2006)/CPI (1980)] = $1,200 X (198.3/77.8) = $3,058.61.

Graduates in January 2006 were getting an average income of $3,000 per month, while in 2006 dollars, graduates in 1980 were getting an average income of $3,058.61 per month. So, the newer graduates are being paid less after adjusting for inflation.