Question

The consumer price index (CPI) is a measure of the average change of prices paid by urban consumers for goods and services. If a worker earned $28.50 per hour in the year 2000, how much would he need to earn in 2004 to have the same buying power as he did in 2000?

Answer 1

$31.37 per hour

Explanation:

In order to calculate how much he needs to earn to have the same buying power we first need to know how much inflation occurred over those years. According to data from the consumer price index charts, these years had the following inflation rates.

• 2000 = 3.4%
• 2001 = 2.8%
• 2002 = 1.6%
• 2003 = 2.3%
• Total = 3.4 + 2.8 + 1.6 + 2.3 = 10.1%

We don't include 2004 because inflation rates are calculated when the year is over and the individual is currently in 2004 in this scenario. Now we multiply the total inflation rate to the amount that the individual was making in the year 2000. But we turn the percentage into a decimal and add 1 to it so that we are increasing the wage.

(10.1 / 100) + 1 = 1.101

28.50 * 1.101 = $31.37

Therefore, the individual needs to have a wage of $31.37 per hour to maintain the same buying power in 2004 as in 2000.