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Current versus Constant (or Real) Dollars

In order to accurately compare income over time, users should adjust the summary measures (medians, means, etc.) for changes in cost of living. The Census Bureau uses the Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI-U) to adjust for changes in the cost of living.1

Current dollars is a term describing income in the year in which a person, household, or family receives it. For example, the income someone received in 1989 unadjusted for inflation is in current dollars.

Constant or real dollars are terms describing income after adjustment for inflation. The Dictionary of Business and Economics defines constant dollar values and real income as shown below.

Constant-dollar value (also called real-dollar value) is a value expressed in dollars adjusted for purchasing power. Constant-dollar values represent an effort to remove the effects of price changes from statistical series reported in dollar terms. The result is a series as it would presumably exist if prices were the same throughout as they were in the base year-in other words, as if the dollar had constant purchasing power.

Real Income. The purchasing power of the income of an individual, group, or nation, computed by adjusting money income to price changes. A comparison between incomes earned during 1970 and 1980, for example, would be pointless unless 1970 and 1980 price levels were identical. Using a price index showing, for example, that average consumer prices increased by 50 percent between those years, it becomes clear that $1,000 in 1980 bought what $667 bought in 1970. Thus, even if total income actually doubled, real income would double only if prices remained constant.

EXAMPLE:
The median household income in 1989 in current dollars is $28,906. If you compared that with the 1990 median household income of $29,943, there appears to be an increase. If you adjusted that 1989 income for changes in the cost of living (converted it to 1990 constant or real dollars), the resulting 1989 median household income is $30,468 (now a 1989-to-1990 comparison of income shows a decline of 1.7 percent).

Footnote:

  1. The Census Bureau uses BLS' experimental Consumer Price Index (CPI-U-X1) for 1967 through 1982 and the CPI-U for 1983 through 1998. The Census Bureau derived the CPI-U indexes for years before 1967 by applying the 1967 CPI-U-X1-to-CPI-U ratio to the 1947 to 1966 CPI-U indexes.

Source: U.S. Census Bureau | Income |  Last Revised: September 17, 2013