Whenever you encounter examples of inflation, or constant dollars, you have experienced the CPI at work. A well known example to counter-act inflation are the Cost Of Living Allowances (COLA). Many contracts provide inflation clauses, and being able to normalize the value of money in prior years with constant dollars is a common requirement. I'll provide a little background on the CPI and examples of constant dollars and inflation to help demonstrate the capabilities of using the CPI-U table.

The CPI is provided by the U.S. Bureau of Labor Statistics and measures the average change in prices paid for a market basket of goods and services. There are two groups, but the most common reference has been the All Urban Consumers (CPI-U) and the index base period of (1982-84=100). You can download the most recent CPI-U update from their website at http://www.bls.gov/data/. They also have an Inflation Calculator, which is good for a single quick calculation and there are many other useful tools.

My example demonstrate several years worth of data analysis on a worksheet and to do that I am using Excel to lookup data from a CPI-U table on another worksheet. This example is what Joe Q. Engineer found when reviewing his salary progression, after his company implemented a salary freeze in 2009.

Joe had begun with nominal salary increases and then after the 2000 'bust' accepted a salary freeze, afterwards received a promotion. His salary increases continued to be nominal for several years. All-in-all when he completed the Salary column in the table above he found his salary had risen 54.1%. That seemed pretty good, but why didn't he seem to have more disposable income? So being an engineer, he figured he could use the CPI to see what had happened and created the Constant $ column. He saw that his real disposable income had only grown 16.7%. Now he wanted to see what his salary would need to be, just to keep even with inflation. So he created the last column, Inflation Adj. It was staggering, he would need to have a salary increase of about 42 grand just to break-even! Joe could now see that inflation of 32.1% had dramatically eroding his real income.

Whether it is your wages, your product price or manufacturing costs, inflation effects all of us and needs to be considered in your personal, or business plans.