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I have adjusted the following data to inflation, and I am confused as my real figures are higher than my nominal terms, but I always assumed that adjusted for inflation figures would be lower (i.e. taking into account price increases over time).

Here is how my nominal data looked like:

year  nom_income   inflation_rate_decimal
1970  100         .028
1971  102          .04
1972  140          .03

I then created a CPI/index as follows:

CPI/index=(1+inflation rate)*100

So with the baseline year, 1970, it would be (1+ .028)*100=102.8

Then for other years= (1+inflation rate)*last year's CPI

So for 1971 it would be: (1+.04)*102.8= 106.912

Finally, to get inflation-adjusted figures, I did the following:

(Nominal Price for Selected Year)*((Index of year selected)/(Index of base year))

And the equation would be: 1970= (100)*(100/100)= $100 1971= (102)*(106.912/100)= $109.1

year  nom_income   inflation_rate_decimal    CPI/index       real_income
1970  100           .028                      102.8           $100 
1971  102           .04                       106.912         $109.1

Is this the correct approach to adjust for inflation?

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1 Answer 1

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It should be (Nominal Price for Selected Year)*((Index of base year)/(Index of selected))

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