What is 'inflation adjusted' and is such an adjustment a valid way of comparing prices?

Inflation-adjustment of economic indicators and the prices of goods and services from different tie periods to the same price level. To adjust for inflation, an indicator is divided by the inflation index.
OK, so is this a valid way of comparing prices? Well, to answer that we should at other ways of comparing prices. We can look at nominal prices of the goods and services, which do not include inflation changes.

If we look at the graph above, we can see that the blue line stands for the nominal house prices in the US and the red line stands for inflation adjustmestment house prices. As we can see, comparison of these two prices give us an idea of the economic situation in particular years. For instance, in 1977 the inflation adjustment price for houses peaked a lot in comparison with the nominal price of that year which seems to be in a stable growth at that period.
If we are talking about the better way of comparing prices, either nominal or inflation adjusted, we should consider the purposes of this consideration. In this case, i mean the house prices, i think it's better to look at the nominal prices, because inflation doesn't give us a detailed picture of the situation as the inflation adjustment does. Though they both dramatically fall in 2008-09 period. In some other cases, such as oil prices, we should look at the nominal prices as well.
The nominal prices comparison does not, actually, give us an idea of the price in previous years if we are not supplied with the inforation like economic situation and inflation rates. We actually see two different prices which exist in two different economic situations.
The inflation adjustment actually enables us to see how the prices have changed over the period of time. For the graphic above we can clearly see that the house which value would be 150000$ in 1979 in the current economic situation is now approximately 175000$ worth, so we can easily conclude that the value of the house increased by 25000$.

this post is so crappy.

1 comment:

chris sivewright said...

Improve your post - paragraphs, graphs, links