The Consumer Price Index (CPI) is an index number determined and published each year by the Bureau of Labor Statistics. It is one measure of inflation and consists of the prices of approximately 300 goods and services purchased by consumers.
Indexes such as the CPI allow us to make comparisons. For example, when considering the cost of something over time, we probably want to adjust for inflation.
To convert a monetary amount from current dollars at time
A to an amount with the same buying power at another time, time O,
we have the ratios:
Dollars @ time A / CPI @ time A = Dollars @ time O / CPI @ time O
Solving for the one unknown gives:
Dollars @ time O = Dollars @ time A * ( CPI @ time O / CPI @ time A )
Example:
Convert the 1974 (time A) minimum wage into constant time 1997 (time O) dollars.
Minimum wage in 1997 dollars = 1974 minimum wage * (CPI in 1997 / CPI in 1974)
Minimum wage in 1997 dollars = 2.00 * (160.3 / 49.3)
Minimum wage in 1997 dollars = $6.50
Example:
Question: By what percentage did the CPI increase from 1974 to 1997?
Answer: (160.3 - 49.3) / 49.3 = 2.25, which is 225%
Question: By what percentage did the minimum wage increase from 1974
to 1997?
Answer: (5.15 - 2.00) / 2.00 = 1.575, which is 157.5%
So the minimum wage did not grow as fast as the cost of a "typical" market basket. This is usually referred to as not "keeping up with inflation."
So, if we measure the minimum wage in constant 1997 dollars, in 1974 it was $6.50. By 1997, the minimum wage had fallen to $5.15. As we saw above, this is another indication that the minimum wage did not keep pace with inflation.