Re: Inflation Calculator

From: Rich Carreiro <rlcarr@animato.arlington.ma.us>
Subject: Re: Inflation Calculator
Date: Mon, 24 Jan 2000 16:06:17 -0500

Next Article (by Subject): Re: Inflation Calculator David Hodges
Previous Article (by Subject): Re: How does a spousal IRA get set up? Help!!! Jeff Salisbury
Top of Thread: Re: Inflation Calculator David Hodges
Next in Thread: Re: Inflation Calculator David Hodges
Articles sorted by: [Date] [Author] [Subject]

>do. But they want a simple inflation calculator. The client puts in the 
>starting year, starting amount, and ending year, and the calculator shows 
>the ending amount as adjusted by inflation.

What is the "ending amount"?  The problem seems underspecified.  Is this
the question you are trying to answer: "I have $1000 today.  If I just
stick it in my mattress, how much will that $1000 be worth in
today's dollars 30 years from now"?

Or is the question: "I have $1000 today.  If I can get a 9% per year
rate of return on that money for 30 years, what will that final amount
be in today's dollars?" (Of course, the first question is the same
as the second one, but using a 0% rate of return instead of a 9% rate
of return).

And do you want to be able to output intermediate results (i.e. values
after each year), or just show the final result?

>1. Where can I get a table of annualized CPI data that shows the percent 
>change from year to year, going back, say, 100 years?
>2. When I have the CPI per cent change from year to year,

First, how do you plan to use a table of past inflation data when
going forward?  You can't just "replay" past inflation series.

>	Y =  X * (1 - C)

It would be
        Y = X / (1 + C)

>Or am I missing something?

Inflation doesn't take dollars away from you (which is what your
calculation does), it makes each dollar worth a bit less.  The
difference is subtle but real.

The same subtlety is often missed when people compute an
inflation-adjusted (i.e. "real") return from the nominal return by
simply subtracting off inflation.  For example given nominal return =
7%, inflation = 3%, many people will say real return = 7% - 3% = 4%.
Actually, the true real return is:

   [(1 + 0.07)/(1 + 0.04)] - 1 = 0.0288 = 2.88%

Admittedly not much of a difference, and fine for just talking about
it, but the errors can chain up over a repeated calculation, and if
you're using a computer anyways, there's no reason not to use the
exact expression instead of an approximation when the exact expression
is so simple.

Rich Carreiro                            rlcarr@animato.arlington.ma.us

- -

Go to Jeff Salisbury LWGate Home Page.