For the easiest way to do a calculation like this, skip the next section and just read the section on using the CPI Calculator. If you want to understand the simple math of doing an inflation calculation, read the next section.
You can find lots of information on inflation on the Bureau of Labor Statistics (BLS) Consumer Price Index website. For access the CPI values for simple inflation calculations, click on CPI Tables in the left menu, then click on the Consumer Price Index History Table link at the top of the page. This opens a simple text file containing data for the Consumer Price Index All Urban Consumers - (CPI-U) from January 1913 until about a month before the current month.
To determine the inflation factor that represents the inflation between any two months, simply divide the CPI value for the later month by the CPI value for the earlier month. The wedding was in October 1974, so I looked up the value for that month and for the latest available month, which as of now is February 2012. Here are the CPI values:
October 1974: 51.1So the inflation factor is 227.663/51.1 = 4.45. This basically says that it requires $4.45 in February 2012 to buy what $1.00 could have bought in October 1974. Next, I multiplied this inflation factor by what the wedding would have cost in October 1974:
February 2012: 227.663
$2,000 x 4.45 = $8,910So the cost of a comparable wedding today relative to what we could have had (if we had actually spent it on the wedding) in October 1974 is about $9,000.
Using the CPI Inflation Calculator
There's an even easier way to calculate the equivalent buying power of any amount between any two years (from 1913 to present). The BLS provides an online CPI Inflation Calculator to do exactly this. Just plug in the amount, select the two years, click Calculate, and the calculator displays the purchasing power of the amount in the second year relative to the first. Click on the link and try it; it's fun and educational.
The calculator tells me that "$2,000 in 1974 has the same buying power as $9,235.82 in 2012".
The calculator gives a slightly different value than my manual wedding calculation. This is because the calculator uses the average annual CPI value for a prior year instead of the CPI value for a specific month. For the current year, the calculator uses most recent CPI value (as I did in my manual calculation). To verify the calculator calculation, I pulled the average annual CPI value for 1974, which is 49.3, and did the calculation manually:
227.663/49.3 x $2,000 = $9,235.82Note that you can also use the calculator to answer a question like, "What would the buying power of $10,000 in 2012 have been in 1974?". The calculator answers this question with a value of $2,165.48.
One question not answered above is whether or not the general inflation of the national economy is representative of the inflation of wedding costs. For example, it is widely known that certain costs such as a college and medical care have risen much faster than the inflation rate of the overall economy. This always is an important consideration when factoring inflation into your financial planning; i.e., that your personal inflation rate may be very different than the inflation rate represented by the CPI.
I don't know the answer to the question about wedding cost inflation. I do know that many people consider $10,000 a paltry sum to spend on a wedding. Having spent my life being frugal, this is hard for me to come to terms with. How about you? What do you think is a reasonable amount to spend on a wedding?
Back to Investing
So what does this have to do with investing? Watch me pull a rabbit out of a hat!
First, inflation is a critical consideration in financial planning, which includes developing an investment strategy to meet your goals.
For example, say you know someone who retired in 1992 with $1,000,000, and has been doing fine. Aside from the fact that investment performance could be very different in the next 20 years than the last 20 years, it's important to understand that it would take about $1,600,000 today to have the same purchasing power that $1,000,000 had in 1992 (calculator says it would take $1,622,687.10). A million bucks isn't what it used to be.
Next, consider that having money to spend on a wedding is a financial goal. You must consider your ability to take risk in investing for any goal. Having money for a wedding is a much shorter-term goal than having money for retirement (at least for a young person). You should take very little risk in your investments intended to achieve short-term goals. Of course if your parents or future in-laws are paying for the wedding, this is not a consideration (lucky you!).
Finally, the more you spend on your wedding, the less you will be able to save and invest for longer-term goals like retirement. Striking a balance between present consumption (spending money) and ensuring a comfortable retirement is tricky. Be sure to think carefully about it, and plan accordingly.
One of my inspirations in writing this somewhat-different-style blog post was TheFinanceBuff blog. It is a great blog published by Bogleheads member tfb. The blog posts often address personal finance and investing topics inspired by events in tfb's life. One thing I really like about the blog is that tfb often challenges conventional wisdom, and presents convincing arguments to support a different point of view. tfb often inspires me to think about investing and personal finance topics in a new way, or presents unique explanations for topics that I already understand.
Note that I have had a link to TheFinanceBuff blog in the right sidebar of my blog since the beginning. It is one of the few blogs I read on a regular basis. I often learn new and interesting things about investing and personal finance in reading tfb's blog. If you can handle reading another blog, I highly recommend TheFinanceBuff.