Tue. Jun 18th, 2024

Like Austin Powers and Dr. Evil can teach us to adjust for inflation

By meerna Jun12,2024

You may not remember the first Austin Powers movie due to its references to inflation adjustment. But University of Chicago economist Damon Jones did.

“This is Dr. Evil. And he gets frozen in time,” Jones said.

In 1967. And he was thawed out in 1997.

“And he came back to conquer the world. So he comes up with a plan,” Jones said. Dr. Evil plans to take the world to ransom for $1 million. And he said, “That’s a lot of money.” They will never come up with this money. And they said, “Is that it?” Is that all you want?”

Dr. Evil did not take inflation into account.

“So $1 million bought a lot more in his day than when he was frostbitten,” Jones said. “Therefore, he should have checked the CPI before entering into negotiations.”

CPI, the Consumer Price Index, shows that a dollar in 1967 could buy about five times more than in 1997 and more than nine times more than today.

(It’s fun to play around with the CPI inflation calculator.)

It’s worth knowing about this by watching old movies and listening to the statements of US Treasury Secretary Janet Yellen, who mentioned inflation correction in the May “Marketplace” program.

“The typical American who didn’t graduate from a four-year college actually saw almost no increase in their real or inflation-adjusted wages for 40 to 50 years,” she said.

In other words, people in this group now earn more. But they don’t feel it.

“They can buy basically the same thing as they did 40 to 50 years ago, but they can’t buy much more than they did 40 to 50 years ago,” explained UBS economist Alan Detmeister, who worked for the Federal Reserve.

Another way economists (including Yellen) refer to inflation-adjusted amounts is by calling them “real.”

“I think of reality as measuring the amount of things and activities that are taking place in order to remove the part that is caused by price increases,” said Jones of the University of Chicago.

For example, real gross domestic product grew at an annual rate of 1.6% last quarter.

“Real” means that it has been adjusted for inflation and there has been an actual increase in economic activity, as prices have risen.

But UBS’s Detmeister said most people take dollar amounts at face value, or what economists call “face value.”

“People think in nominal terms. So their salary increase is good. Price increases are bad,” he said.

But these two things are usually related. Detmeister said we should think: How much more can I buy with this wage increase?

So when negotiating a salary increase, you can check how much your CPI has increased since the last raise. This way you will know how much more you will need to survive.

You don’t want to pull a Doctor Evil and sell yourself short.

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By meerna

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