Inflation image by Gregor Rohrig - click to see source

One of the forms of data that journalists frequently have to deal with is prices. And while it’s one thing to say that things are getting more expensive, making a meaningful comparison between what things cost now and what things cost then is a different kettle of fish altogether.

Factoring in inflation can make all the difference between arbitrary comparisons that provide no insight whatsoever, and genuinely meaningful reporting.

Thanks to computing power it’s actually quite easy for journalists to factor inflation into their reporting – by using an inflation calculator. It’s also easier to find historical price data with data-driven search engines like Wolfram Alpha.

But inflation is only half of the calculation you need. The other is earnings.

Professor Ian Stewart illustrates this perfectly in this article in The Telegraph:

“[A] 1991 pint cost around £1.40, which is £1.80 in today’s money. The current price is around £2.80, so beer really is more expensive. On the other hand, the average salary in 1991 was £19,000, and today it is £38,000. Relative to what we earn, a pint costs exactly the same as it did 19 years ago.

“Our house? That would be £125,000 today, so it has gone up by 84 per cent. Relative to average earnings, however, the increase is only 10 per cent.

“The Guardian knows about inflation, and said that the pub pint has increased by 68 per cent in real terms. But this compares the real increase in new money with the original price in old money. If I did the calculation like that for my house it would have gone up by 850 per cent. Calculated sensibly, the rise in the price of beer is about 55 per cent relative to inflation, and zero per cent relative to earnings.”

Of course the danger in averages is that they only illustrate aggregate change, and if you’re talking about a purchase that a particular section of the population makes – or you’re only talking to a particular region – then a national average may not be as meaningful a comparison to make.

If the poor are getting poorer and the rich richer then a pint of beer really is more expensive for some – and cheaper for others – than it used to be. Likewise, particular parts of the country might be suffering more from house price increases than others because of local average wages and local house prices.

It’s also worth pointing out that, when talking about financial data, a median is a much more useful measure to take than a mean.

Finally, aside from the statistical considerations it’s worth coming back to some of the basics of pricing. Ian again:

“There are two things to remember about prices. One is basic economics: if something gets too expensive for people to buy it, they don’t. So prices and wages have to stay in step, broadly speaking – though with big fluctuations in some commodities, such as housing. The other is inflation. We all know it exists, but we forget that when we start comparing prices. ‘My God! A Ford Anglia cost only £295 in 1940!’ True, but the average salary then was £370. The equivalent price today is £30,000, which will buy you a Jaguar XF.”