Inflationadjusted

Inflation-adjusted, often described as inflation-adjusted values or real terms, refers to monetary figures converted from nominal terms into a common set of prices to reflect changes in the overall price level over time. By removing the distorting effects of inflation, inflation-adjusted measures enable meaningful comparisons across periods for wages, incomes, spending, and asset values. The adjustment uses a price index, such as the consumer price index (CPI) or the GDP deflator, to express past amounts in terms of the purchasing power of a chosen base year.

Calculation is typically done by applying a formula that relates the price index in the base year to the index in the observation year. Real value in base-year dollars equals the nominal amount multiplied by the ratio of the base-year index to the observation-year index. In practice, this means comparing past amounts with current prices or vice versa, depending on the chosen base year and context.

Common uses include evaluating wages, pensions, and social benefits over time; performing historical economic analyses; budgeting in real terms for governments or corporations; and reporting investment returns in terms that reflect true purchasing power. The choice of index matters: CPI focuses on consumer prices, while GDP deflator covers all domestically produced goods and services; different indices and base years yield different results.

Limitations exist: no index perfectly captures every change in living costs, and issues such as substitution bias, quality changes, geographic variation, and measurement lags can affect accuracy. Inflation-adjusted figures should be interpreted with awareness of the index and base year used.