Introduction
Generally, when I use cost data from the past, I tend to perform some kind of inflation adjustment. That’s because the value of $1 is not the same today as it was a year ago. Therefore, we need an approach to adjust the value of past costs into today’s terms. We think of past costs as nominal (or unadjusted) costs. To express these costs into today’s value, we need to perform an inflation adjustment.
Recently, I was working with my students, and they had pulled cost data from the Agency for Healthcare Research and Quality (AHRQ) Medical Expenditure Panel Survey (MEPS). MEPS provides healthcare expenditure data on a number of categories (e.g., total, outpatient, inpatient, and pharmacy). Once can download and use the MEPS data to study the trends in healthcare costs over time. However, the past healthcare costs are not adjusted for time and will require some application of a price index.
Depending on your needs, MEPS provides recommendations on what kind of price index to use. The most common price index is the Consumer Price Index (CPI). The United States (US) Bureau of Labor and Statistics (BLS) provides data on the CPI, which can be accessed on their website (link). According to the BLS site, “The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
The BLS also has a CPI calculator where you can enter the dollar amount at a specific month and year to estimate its inflation adjusted amount.
However, if you want to use the actual CPI data, you can download these from the BLS website (link).
Consumer Price Index Example
Here is a short tutorial on how to download the CPI data and perform an inflation adjustment.
Step 1. Download the CPI data from the BLS website.
Navigate to the BLS website (link). Click on “Tables.” This will bring you to the BLS CPI database page.
You see links to archived CPI releases. There is a lot of data on this site. To make things easier, we’ll focus on the annual CPI numbers.
Step 2. Select the Historical CPI-U, which contains all the annual CPI from its inception in the United States. This will be helpful in converting any dollar year into the inflation-adjusted dollar.
Note: We use the CPI-U because it includes all urban consumers, which represents over 90% of the total US population. There are other types of CPI calculations that you can use based on your needs. I encourage you to explore these.
Once you have downloaded the Historical CPI-U file. Open it and review the columns. The column that we are interested in is the “Annual” column, which contains the annual CPI for that year.
Step 3: Let’s suppose that we were interested in performing an inflation adjustment for $100 in 2028 to 2025 value. We take the CPI for 2025, which is 321.943 and divide this by the CPI from 2008, which is 215.303.
Step 4: Once we have the inflation adjustment ratio, we can multiply this by $100 from 2008 to get the 2025 inflation-adjusted value.
Therefore, $100 in 2008 is worth $149.53 in 2025.
Personal Consumption Expenditures Example
But what if you wanted to use the Personal Consumption Expenditures (PCE) Price Index instead of CPI? MEPS recommends we use the PCE Price Index when we pool data from multiple years or evaluate trends across multiple years.
The PCE Price Index is available from the US Department of Commerce Bureau of Economic Analysis (BEA)website (link).
According to the Bureau of Economic Analysis, the PCE Price Index measures the “prices that people living in the United States, or those buying on their behalf, pay for goods and services.”
To get the PCE Price Index, you will need to do the following:
Step 1: Go to the BEA’s PCE Price Index website (link). Select Tools > Interactive Data. From there Select “Gross Domestic Product / Personal Income.” This will take you to another page where you can finally select “Interactive Data Tables.”
Step 2: In the interaction data tables page, Select “Section 2 – Personal Income and Outlays.” This will expand the field. Scroll down and Select “Table 2.5.4. Price Indexes for Personal Consumption Expenditures by Function (A).” The (A) indicates “Annual.” This opens the Interaction table where you can Modify the date range. By default, it will give you the most recent year and the last several years.
Step 3: Use the “Modify” option to change the time range.
Change the “First Year” to “2008 A,” This will expand the PCE Price Index time year from 2008 to 2024.
Notice that we don’t have 2025 on this Interactive table. The 2025 annual PCE Price Index is available, but you will have to do a little more digging.
Step 4: Go back to the National Income and Products Account and Select Table 2.8.4. Price Indexes for Personal Consumption Expenditures by Major Type of Product, Monthly (M).
Copy the PCE Price Index for the months of January all the way to December for 2025.
Paste this into Excel and average the PCE Price Index for all twelve months. This will give you the PCE Price Index for 2025.
Step 5: Now that we have the PCE Price Index for 2025, we can return to our previous example and perform an inflation adjustment of $100 from 2008 to its inflation-adjustment 2025 value.
We take the PCE Price Index for 2025, which is 126.919 and divide this by the PCE Price Index from 2008, which is 89.197.
Step 6: Once we have the inflation adjustment ratio, we can multiply this by $100 from 2008 to get the 2025 inflation-adjusted value.
Therefore, $100 in 2008 is worth $142.29 in 2025.
Conclusions
Adjusting past costs to current value is an important part of performing economic analyses, particularly when we are looking at the trends. If we don’t make this adjustment, our analysis will be incorrect and will generate the wrong conclusions. In this article, I reviewed two types of price indices, but there are others. MEPS provides a nice guideline on which ones to use on their website (link), and I encourage you to explore these.
Disclosures
This is a work in progress and subject to future changes.
This is for educational purposes only.