The Buying Power of a Dollar, for Christmas Gifts and Beyond

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Glenn Barnes

Glenn Barnes is Associate Director with the Environmental Finance Center based at the UNC School of Government.

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Twelve drummers drumming, eleven pipers piping, ten lords a leaping, nine ladies dancing…

If you are like me at this time of year, busy with last-minute gift shopping, you may have the sinking feeling that every year it costs more and more to buy presents for our loved ones.  To put it another way, a dollar just doesn’t seem to go as far as it used to.

This is not your brain playing tricks on you but rather a real world encounter with the important economic concept of inflation.  For those of us working on community and economic development, the idea that the value of a dollar changes over time should impact our thinking on everything from the buying power of our citizens to the future cost of capital improvements.

Eight maids a milking, seven swans a swimming, six geese a laying…

Perhaps the best known measure of inflation is the Consumer Price Index which is published monthly by the Bureau of Labor Statistics.  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.  Those goods and services are classified into eight major groups including food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.  Also included are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls and taxes on goods and services.

The Consumer Price Index is a good measure of the relative buying power of an average consumer in your community (or of one of your employees as you consider potential annual salary changes).  And some water and wastewater systems tie rate increases to the Consumer Price Index.  However, it is not the only measure of inflation calculated.

Five golden rings…

ENR, the Engineering News-Record, calculates a Construction Cost Index, which averages the prices for labor and key construction materials from 20 cities across the United States.   Whilst the Consumer Price Index may be more appropriate to measure, for example, the ability of a water system to cover rising costs and the ability of its customers to pay bills, the Construction Cost Index may be more appropriate for that same water system to estimate the future costs of infrastructure improvements in its capital plan.

Over the past decade, the Consumer Price Index has been more stable than the Construction Cost Index, with annual increases generally between 1 and 4 percent (with the exception of a negative change in 2009 during the recession).  The Construction Cost Index in the same period has been a bit more volatile, with increases as high as 8.5 percent in 2007 and as low as 0 percent in 2008 (looking at a chart of the price changes, the ramp up of housing prices and the subsequent bubble burst are evident).

CPI-and-CCI-graph-1984-2011

Four calling birds, three French hens, two turtle doves…

In fact, any set of goods and services measured consistently over time can provide valuable information about inflation.  For the past 30 years, PNC Wealth Management has calculated inflation by totaling the value of all of the gifts given in the song “The 12 Days of Christmas.”  Whether you prefer Muppets or a capella, the Christmas Price Index is always based on the same basket of gifts from the true love.  And while year-to-year differences may vary, over time the Christmas Price Index proves to be a fairly accurate measure.  It is 116 percent higher this year than when it was first measured in 1984, while inflation is up 122 percent over the same period.

Christmas_Price_Index

Whatever measure you find most appropriate, it is important to remember that the buying power of a dollar is not static, whether you are calculating potential economic development impacts, water rates, or future capital projects, or whether you just need to buy that last-minute partridge in a pear tree.

 

Glenn Barnes (23 Posts)

Glenn Barnes is Associate Director with the Environmental Finance Center based at the UNC School of Government.


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