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Definition of "purchasing power loss/gain"
An increase or decrease in how much consumers can buy with a given amount of money. Consumers lose purchasing power when prices increase, and gain purchasing power when prices decrease. Causes of purchasing power loss include government regulations, inflation and natural and man-made disasters. Causes of purchasing power gain include deflation and technological innovation.
How to calculate?
Step 1Select a base year and a target year for determining purchasing power. The base year and the target years can be any of your choice—for example, the year 2005 as the target year and the year 1975 as the base year.
Step 2
Collect the Consumer Price Index data for the base year and the target year. Use a chart provided by the Bureau of Labor Statistics . The chart indicates an average CPI of 53.8 for 1975 and a CPI of 195.3 for 2005.
Step 3Divide the CPI of the base year by the CPI of the target year. In other words, the calculation for 1975 and 2005 would be 53.8 divided by 195.3, or .2754. Once you have the quotient, multiply it by 100 to derive the percentage of change: 27.54 percent.
Step 4
Subtract the percentage amount you have derived from 100 to determine the percentage of change. In this case, the difference of 100 minus 27.54 is 72.46, which indicates that the purchasing power of the dollar has gone down by 72.46 percent between 1975 and 2005.
Step 5
Calculate the change in purchasing power in actual dollars. Do this by multiplying the reverse quotient from above (this time, the target year divided by the base year, or 195.3 divided by 53.8) by the amount you have chosen: for example, $200.
The target year CPI of 195.3 divided by the base year CPI of 53.8 is 3.63. And 3.63 multiplied by 200 is $726. In other words, something that cost $200 in 1975 would have cost $726 in 2005.
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