Inflation measures the overall rise in prices of goods and services, which, in turn, reduces the purchasing power of a currency like the U.S. dollar. Prices can go up—and buying power can go down—for many reasons, including supply shortages and rising consumer demand. An increase in the supply of money (which occurs when governments print more banknotes, like Germany’s Weimar Republic did to pay for the costs of World War I) can also cause hyperinflation, or out-of-control, runaway price increases.
Most online inflation calculators use data from the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI), which has tracked price changes in the U.S. since 1913. More specifically, CPI measures the prices that urban consumers pay for a “market basket” of common items, like fruits and vegetables, as well as services such as haircuts and doctor’s visits.
As prices go up, the buying power of the dollar goes down, with people unable to buy as much with the same amount of money—a trend that also makes CPI useful for evaluating wages and salaries. Employees might ask for a raise because inflation has eroded the purchasing power of their paychecks, for instance. Though CPI has received its fair share of criticism and been questioned for its accuracy (economists have argued that CPI’s methodology both overstates and understates inflation), for now, it’s the best metric the government has. Online inflation calculators, then, are only as good as CPI. “They’re as accurate as we can make them,” says Mahon.
Online inflation calculators become less reliable when used to compute the purchasing power of the U.S. dollar before 1913. For pre-1913 inflation, calculators have to rely on estimates that economists have retroactively pieced together from advertisements, newspapers and other historical records to get a rough indication of price changes. “We’re confident in data going back to 1913. Before that, it becomes a little sketchier,” says Art Rolnick, the former director of research at the Minneapolis Fed and an economist at the University of Minnesota.
Comparing prices also gets fuzzy when it comes to products and services that have improved over time, such as TVs, cars and smartphones. Though BLS economists do their best to factor quality improvements into CPI (as well as decreases in quantity and product sizes, a phenomenon that’s been called “shrinkflation”), some outside experts argue that they’re not fully capturing these hidden price changes.
“A car today is not the same as a car back in 1950,” says Rolnick. “When we try to compare what we were buying in the basket of goods today to what we were buying years ago, we have to take quality into account and that’s not easy. When you get deep into it, these aren’t easy comparisons.”