4-D.3
Inflation Adjustments

Chapter 3 discussed the procedures used by the Census Bureau to adjust income amounts for the 1-year, 3-year, and 5-year period estimates and housing value and cost amounts for the 3-year and 5-year period estimates to reflect changes in the national all-item consumer price index (CPI) over the period (see Section 3-A.2.c and Table 3-1). The discussion underlined the importance of users understanding the resulting estimates—for example, a 5-year period estimate of income or housing value is the average of all of the reported amounts over the 5 years expressed in dollars for the latest year using a national CPI adjustment. Moreover, as with any period estimate, the same inflation-adjusted average dollar amount for two areas may reflect different underlying patterns—for example, average income for 2005–2009 expressed in 2009 dollars of, say, $40,000 could result from income growth, stability, or decline over the 5-year period.

For many applications, users may prefer the Census Bureau’s adjustment to latest-year dollars by using the national CPI to some other inflation adjustment or to no inflation adjustment at all. One advantage is that 1-year, 3-year, and 5-year period estimates for a large city or county will all be expressed in dollars for the same (latest) year—for example, 2009 dollars in the case of estimates for 2009, 2007–2009, and 2005–2009.

For some applications, however, users might prefer an inflation adjustment that is specific by geographic area. The problem is that area price data are limited. Currently, the Bureau of Labor Statistics (BLS) collects price data for over 100 specific areas, but it publishes price indexes for only the four regions (Northeast, Midwest, South, and West), population size classes of metropolitan statistical areas (MSAs), and the 20 largest MSAs. No price data are collected for rural areas.10 Moreover, variation in price changes may be as great within areas for which price indexes are available as among them—for example, prices for housing and other goods may increase at a very different rate in the central city and suburbs, let alone individual neighborhoods, of an MSA. Finally, area-specific price indexes are less precise than the national all-item CPI.

For still other applications, users may require latest-year estimates for income, housing costs, or housing value. Averages of reported amounts over 3 or 5 years adjusted for inflation to the latest year are not likely to be the same as latest-year amounts. For income, this is true even for the 1-year period estimates: inflation-adjusted averages of reported income over the 23 months covered in 1-year period estimates are not likely to be the same as latest-year income estimates.

For estimating latest-year housing amounts from multiyear averages,



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