An inflation calculator is a calculator that is used to calculate the equivalent value of US dollar in any year from 1914 to 2015. This calculator is based on the average annual CPI data in the United States from 1914 to 2014.
What is Inflation?
Inflation is tantamount to inflating a balloon that gets bigger on the outside, with nothing inside. Inflation, as an economics term, means that the money supply is rising, along with prices, while the economy stays the same. The real value of money decreases, so prices rise, because it takes more money to buy the same thing.
Inflation has been known, historically, to spiral out of control, with prices rises hysterically far ahead of the incomes of the population. This happened, for example, in the U.S. in the 1970s and early 1980s. In 1973, inflation doubled, reaching 8.8 percent. By 1978, it had reached 12 percent. In 1980, it had climbed to 14 percent.
So economists worry about controlling inflation. They measure it in terms of the Consumer Price Index, which shows, on the basis of a weighted average, whether prices are going up or down. If prices are going up too far, too fast, something must be done to control inflation.
What actions are taken depend on the central bank, which, in the U.S., is the Federal Reserve. There is a range of different views among economists, however, about what causes inflation and how to control it.
One of the mainly widespread views presently is that of the monetarists, who suppose that increases to the money supply cause inflation. As a result, the Federal Reserve has, in the past, and expects, in the future, to pursue a policy in which interest rates are increased as inflation increases, in an effort to control it. Higher rates of interest on money have the effect of making it more expensive, and limiting the money supply. At the same time, the central bank intervenes in the securities market place to decrease the supply of money.
In the past few years, the Federal Reserve has been overruling in the securities market in such a way as to increase the overall supply of money. This policy is called quantitative easing, and is intended to stimulate the economy. Some economists fear that it will lead to inflation. Definitely, the central bank is carefully watching out for signs of rising prices.
One should, of course, be aware that high rates of interest make credit more costly, thus make access by business to funds needed for operations more costly. The effect can be to damage the economy and to decrease employment. But, in the past, raising interest rates has productively controlled inflation, as it did in the 1980s.
Other techniques used to control inflation have included wage and price controls – freezing salary increases and forcing companies to keep prices at the same levels. These have not been successful in American history, but they have a record of success in other countries.
Countries like Ukraine and Brazil have endured long periods of 200 percent inflation. During these periods, the currency of the country was essentially valueless, and the population survived by using foreign hard currency and by stocking up on useful durable goods that retained value. But such high inflation created conditions of great hardship, which is why governments try to control inflation very carefully.
How is inflation calculated?
Calculating inflation is a multifaceted challenge. Usually, a selection of typical goods on the market is put together, and the cost of this group is compared at assorted times. If the cost is much higher in later years, then the value of the currency can be determined at a lower level.
In the U.S., the most representative assortment of goods for the purpose of calculating inflation is the Consumer Price Index. The Bureau of Labor Statistics compiles this. The Bureau takes a huge review of the prices of consumer goods in the country, and keeps a comparative index of increases or declines.
If a single dollar purchases x amount of goods in one year, but only less than x in a later year, then the purchasing power value of the dollar has declined and can be calculated.
How to Protect Yourself from Inflation?
The best way to guard your assets from inflation is to make investments that value as fast as or faster than the rate of inflation. Investments in goods like gold that go up over the years, or investments in fixed-rate securities at a rate that is greater than inflation are possible ways to protect against inflation. But the investor must always be attentive to the risk exposure in any such investment.
Looking at the Inflation Calculator, you can see that it is based on the Consumer Price Index. The first inflation calculator takes a dollar from a previous year, and shows how inflation affects its value in a later year. In other words, what a single dollar would buy in an earlier year will require more than that in a later one – the inflation calculator tells you how much more. The second inflation calculator shows how inflation will affect the value of your money in the future. What one-dollar will buy today will require more than one dollar in a few years – the inflation calculator tells you how much more. The third inflation calculator shows how much less a dollar will be worth at a given rate of inflation after a certain number of years.