Calculating Inflation-Adjusted Wages

It is common for someone to want to know if their pay is keeping pace with inflation. An approach to calculating inflation-adjusted figures follows, using the U.S. Consumer Price Index for all Urban consumers (CPI-U) from the Bureau of Labor Statistics, a commonly used measure of inflation. The CPI-U is an index depicting average prices for goods and services paid by urban consumers in the U.S. 

The CPI-U can be used as a deflator of the value of the consumer's dollar to find its purchasing power. The purchasing power of the consumer's dollar measures the change in the value to the consumer of goods and services that a dollar will buy at different dates. In other words, as prices increase, the purchasing power of the consumer's dollar declines.

Assumptions

  1. Because of different economic conditions in different areas, the CPI-U may not necessarily fit an area in the short-run; but for Utah over the long-run, the use of the CPI-U seems appropriate.
  2. The CPI-U may not necessarily represent the inflation patterns of individual budgets that may be more closely related to specific costs, such as housing, fuel, or medical supplies..

Calculating inflation-adjusted wages

To measure the effect of inflation on the purchasing power of a dollar, calculate the ratio between any two dates of CPI-U values. Then multiply the unadjusted dollar value by the ratio just calculated to render inflation-adjusted dollars.

For example, in January 2025 the CPI-U index was 317.7, while in January 2020 the CPI-U index was 258.0.

  • To express purchasing power in 2025 dollars, put the 2025 CPI-U value in the denominator of the ratio: 258 ÷ 317.7 = 0.81. This ratio means that $1 in January 2025 had about the same purchasing power as $0.81 in January 2020.
  • To express purchasing power in 2020 dollars, put the 2020 CPI-U value in the denominator of the ratio: 317.7 ÷ 258 = 1.23. This ratio means that $1 in January 2020 had about the same purchasing power as $1.23 in January 2025. If your earnings did not go up by at least 23% over this five year period, you would have lost purchasing power due to inflation, according to the CPI-U.

Additional resources

CPI-U Inflation Calculator: https://www.bls.gov/data/inflation_calculator.htm

CPI-U historical values: https://data.bls.gov/timeseries/CUUR0000SA0 

Frequently asked questions about the CPI: https://www.bls.gov/cpi/questions-and-answers.htm 

For additional questions, please contact one of our labor market economists: https://jobs.utah.gov/wi/wiexperts/ 

Source: Utah Department of Workforce Services, Workforce Research and Analysis Division.