Inflation adjustment helps you express past prices and incomes in present terms. To adjust dollar values for inflation, you have to multiply them by the inflation adjustment factor. The inflation adjustment factor expresses the cumulative inflation since the past price level was quoted and is found by using the annual CPI inflation published by the U.S. Bureau of Labor Statistics.
Calculating the Inflation Adjustment Factor
To calculate the inflation adjustment factor, you need to pull up the annual inflation levels for each of the years in your price range. You then add one to each of those numbers and multiply the resulting figures. The end result is the inflation adjustment factor. When you multiply the past price or wage by this factor, you will have adjusted the past price or wage level for inflation. Assume you were paying $35,000 to an employee in 2011 and wish to adjust this figure for inflation. The annual inflation levels for the years since, 2012 and 2013 are 1.7 percent and 1.5 percent respectively. The inflation adjustment factor is (1+1.17%)_(1+1.5%) = 1.0323. So $35,000 adjusted for inflation equals $35,000_1.0323, or $36,129.