Released February 5, 2010
RALEIGH, N.C. — When comparing economic numbers, it's important to adjust for inflation. Why is this important? And is there a particular market where controlling for inflation is sometimes forgotten?
Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:
"Inflation simply means the cost of living is going up. So if, for example, ... your income rises with the inflation rate that means you are only treading water; you are not really getting ahead. Same way for a business, if their prices or their revenues go up only with the rate of inflation, they are not also getting ahead.
"So it is typical for people to look at their salary gains and say, 'OK, if I had a salary gain of 3 percent but the inflation rate was 2 percent, I'm only one percent ahead.
"One area, though, where it seems like we forget to do this more so than others is in investing -- and particularly in the stock market. You will hear stock analysts always quote stock prices or index values as going up at a certain percentage rate and they don't, they don't back out the inflation rate.
"And when you do this what you see is, for example, the stock market has not performed as well over time as we would have thought. In fact, the market decline that we saw in 2008 and 2009 would have been much larger when you take account of inflation.
"So inflation is very important. It affects every aspect of our financial lives but particularly you should not forget to take it into account in the financial area."
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http://www.ncsu.edu/project/calscommblogs/news/archives/2010/02/economic_perspe_547.html
