Question

Use the CPI - Urban graph from the FRED Database provided:

Click here for the graph (Links to an external site.)

https://fred.stlouisfed.org/graph/?g=m5I1

Example:

To calculate the annual inflation rate for 1 year from H2 2017 to H2 2018 (H = half year, H1 = first half of the year, H2 = second half of the year).

Formula: (H2 2018 - H2 2017)/H2 2017 x 100

Answer: (252.125 - 246.163)/246.163 x 100 = 2.42%

This was the inflation rate for 2018 using CPI - Urban. For your income to have the same purchasing power as the previous year you would have to receive a 2.42% raise. $20,000 income x 2.42% = $484 + $20,000 = $20,484

If you did not receive a raise you are now able to purchase 2.42% less goods because of the price inflation of goods. $20,000 x 2.42% = $484, $20,000-$484 = $19,516

Homework

Using the same graph calculate the % raise an individual would have to receive over a 10 year period, this person retired in H2 2009 with an income of $30,000.

1. Calculate the increase in inflation from H2 2009 to H2 2018.

2. Calculate how much the individuals income would need to be to equal the purchasing power of 2009.

3. Calculate the individual's purchasing power in 2018 dollars of income, compared to the 2009 income of $30,000.

Answer 1

Year	H1	H2	Inflation Rate
2008	214.429	216.177
2009	213.139	215.935	-0.0011
2010	217.535	218.576	2.641
2011	223.598	226.28	7.704
2012	228.85	230.338	4.058
2013	232.366	233.548	3.21
2014	236.384	237.008	3.46
2015	236.265	237.769	0.761
2016	238.778	241.237	3.468
2017	244.076	246.163	4.926
2018	250.089	252.125	5.962

This is the calculation of increasing inflation rate from H2 2009 to H2 2018.

2.

3.As the individual retired in 2009 his income did not change but inflation rate increased over time so his purchasing power in 2018 will be less than 2009,

Purchasing power of 2018 = $30,000 - $30,000*5.962

  = $30,000 - $ 1788

= $28,212