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At an intellectual level, everyone understands that inflation affects prices – the same product or service costs more because our money is worth less. But at the same time, technology and other economic factors can also have an affect on prices, which is why computers and other electronic technology devices seem to get cheaper all the time, even with monetary inflation. So it can be hard to tell if the things we buy are really more expensive than they used to be.
This is why economists have developed the idea of adjusting for inflation. By taking the price for a similar commodity from the past and adjusting that number for inflation, it provides a method for comparing prices from different eras.
Question: According to the GasBuddy website (www.gasbuddy.com) the average price for a gallon of gasoline in the United States on June 25, 2009 was $2.63. Adjusting for inflation, how does this price compare to the average price in 1979?
A.) Higher
B.) Lower
C.) About the same
And The Answer Is…
The correct answer is “B”.
Using data from the Consumer Price Index, which the Bureau of Labor Statistics uses to calculate inflation, $2.63 today is the equivalent of .79 in 1979. From historical information provided by the Energy Information Administration, the average price of a gallon of gasoline in the United States in 1979 was .86 per gallon. This means a gallon of gas is 8% cheaper today than it was 30 years ago.
