The Actual Inflation Rate

matthew's picture

My brain has recently been focusing on money. I mean, I'm pretty good with numbers. I enjoy math, and I like to figure out min/max statistics for online role-playing games I play in order to create the most effective character in most situations.

The other day, I thought, "why not apply that same mentality I use in gaming to my life?"

I earn very nearly the same amount of money today (within 3%) in 2007 that I earned in 2001. I heard a fellow on a talk-radio show indicate that government statistics of 2%-4% inflation per year were not even close to accurate, and actual inflation rates if we figured according to 1970's-era and earlier calculations would tell us a story of greater than 10% inflation since 9/11/2001.

So I decided to apply my puny little brain and think in terms of "How much can I buy for my dollar?" I mean, I make almost exactly the same amount in dollars today that I did six years ago. If we look at just the last five years, from, say, September of 2002 to September of 2007, I should get a good idea of what the actual inflation rate is.

All figures are with annual compounding. Monthly/weekly/continuous compounding figures are very slightly lower.

Item September 2002 September 2007 Inflation
Gold (ounce) $310 $670 16.6%/year
Oil (barrel) $26 $75 23.6%/year
2,000 sq ft townhouse (mine) $100K $150K 8.4%/year
1 gallon of 2% milk $2.14 $3.54 10.6%/year

Based on this small sampling of things the average consumer might buy -- investing in gold, buying fuel, buying a house, or picking up a gallon of milk -- I would also submit that a 2-4% inflation rate is overly optimistic. It certainly feels like 10% or more. Simple fact is, my dollar doesn't seem to go nearly as far as it did five years ago. In fact, five years ago my salary felt generous, enough to afford plenty of luxuries. Today, it barely covers expenses.

Admittedly, we have two extra mouths to feed. So that skews my sampling-size-of-one.

What I found interesting is how hard it is to get data on average consumer items. Like, what if I wanted to check the new retail cost of a Toyota Camry with standard options in 2002 versus 2007? Good luck digging that up. Or what about the cost of a non-king-size Snickers bar in 2002 versus 2007? Yeah, no luck there either. Cost per kilowatt-hour of electricity?

It seems in so many of these things, we have an awfully short memory... and manufacturers or providers of goods and services don't seem to go out of their way to point out how much more their stuff costs.

Nifty little inflation calculator:

Unfortunately, at least for my relatively small sample size above, it's totally off-base. This next one offers a more usable output, indicating inflation over the past five years has been around 14%-15%... a figure I totally agree with, and which is totally at odds with the figures put out by the administration.

(EDIT: I totally mis-read their figures. They are claiming a total inflation increase of around 14%-15% from August 2002 to August 2007, which is bogus. It's a 10%-15% compounded... So these guys are using official statistics, which I suspect are being intentionally manipulated to give citizens overly-optimistic inflation data.)

Also a nifty time-value-of-money calculator which will solve for any of the variables (like interest rate):

I have a conclusion. I am being misled about inflation by those in who's best interest it is to mislead me. The actual inflation rate over the past five years has been 10%-15% per year, which is a level unheard-of since the 1970s. From everything I see, it's going to get much worse before it gets better, as we have to increase taxation to pay the bills due on our simultaneous wars in Iraq and Afghanistan, unfunded school mandates in "No Child Left Behind", and initiatives like the RealID card.

From 1972-1979, the US dollar lost 2/3 of its value. I predict the same, or worse, for 2007-2014. Time for me to find some overseas shelters for my meager savings.

Then again, I'm a UNIX admin, not an economist. Imagine that you earned $65,000/year in 2002 and didn't get a raise for five years. Based on the cost of a gallon of milk, in 2002 dollars, you're earning only $39,277/year today.

What do you think? Time to panic? Or is that time long since gone? Or are my figures just way, way off?


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matthew's picture

Cost of living

Another interesting tidbit... according to the cost of "real stuff" I used above, in order to maintain your standard of living in "real stuff" if the inflation rate is actually higher, here are sobering statistics:

Assume you made $80,000 a year in 2002.

If inflation is 15%, you need to make $160,909 this year in order to have the same standard of living. This experience of everything being just about double what it was then jives with my experience: a 200% cost-of-living adjustment.

If it is 10% -- a figure far more economists agree with -- you'd need to make $128,841, or about a 150% cost-of-living adjustment.

If the government is correct and it's been, say, 5%, you need only make a paltry $102,102, or a 125% cost-of-living adjustment.

If you made $80K in 2002, you're only making less than $40K/year in 2002 dollars at a 15% rate, $50K/year at a 10% rate, or $63K at a 5% rate.

Matthew P. Barnson

Matthew P. Barnson

daniel's picture


I have a lot of respect for your intellect, Matt, but I think you're getting ahead of yourself here. While CPI performance is reflective of "all" households, and therefore you specifically may be experiencing 15% compounded inflation rate, I would find that remarkable.

The BLS calculates inflation by monitoring prices on a very broad range (80,000 items!) of market goods. You seem to be challenging that by picking 4 items, 2 of which have nothing to do with regular purchases. Yes, oil's gone up a lot, but you haven't seen prices of most oil-derived products increase a similar amount. Using my own company as an example, some of our products use significant amounts of petroleum. Productivity gains and competitive pressure on margins has kept our price growth closer to 3-4% per year, even though oil has climbed much more quickly. Gold has gained significantly, but that's a single investment vehicle. What's the inflation rate if you used iPhones and CRT monitors? I encourage you to spend some more time on the BLS website.

I'm not saying that these things are beyond debate, merely that your approach seems dubious.

Who do you think benefits from lying about the inflation rate? (I can't believe that more than 10% of people in the US could accurately provide the most recent inflation figures, but all of them know if they are satisfied with their standard of living.) And how are they manipulating huge teams of economists and statisticians without anyone internal crying foul? I smell a tinfoil hat.

matthew's picture


I'm not saying that these things are beyond debate, merely that your approach seems dubious.

Yep, that's why I asked for someone to call me on it :) Glad you chimed in.

Who do you think benefits from lying about the inflation rate?...And how are they manipulating huge teams of economists and statisticians without anyone internal crying foul?

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. Both are the refuge of political and economic opportunists." - Ernest Hemingway

The big-ticket items are way, way, way out of whack with general inflation. My point is not that there is a conspiracy to deflate inflation, but that if we were to apply 1970s-era inflation calculations to today's data, we'd come to an entirely different conclusion. The current CPI-U was established in 1982 following the stagflation of the 1970s.

Who stands to benefit most from under-reporting inflation? Whoever is currently in office, from Reagan to Bush to Clinton to Bush, and the Consumer Price Index lags volatile big-ticket consumer items by a great deal. From the USA Today article above, the cost of housing, education, and medical care are way out of whack with general inflation and have been for a long time. While they might be considered a statistical anomaly, a house payment in-line with current prices would take up somewhere between 45%-55% of my take-home pay, whereas 2002 prices would only take 25%-30%. Vegetables, due to oil price increases, cost nearly twice what they did five years ago.

It seems as if we are living bubble to bubble: the S&L bailout of the late 1980s. The .com bubble bursting. The housing bubble bursting. My suspicion is that the CPI is unfairly influenced by cheap imported goods and inexpensive vehicles, and doesn't apply sufficient weight to consumables and repeat expenses.

Unfortunately, I was unable to find the specific page referencing how inflation was calculated in the '70s vs. today. I'll have to keep looking.

Basically, between house payments, college tuition and books for my wife in her Master's program, medical and dental bills for my kids, food, gas, and power/gas bills... that's it. I'm tapped. And I really wasn't five years ago.

Matthew P. Barnson

Matthew P. Barnson