Constant Year Dollars as a Focal Point (CY$)

Comparison of Various Index, 1996 = 100

Reports often show dollars amounts in something called "constant year dollars," abbreviated CY$, but the meaning behind them is generally not clear. (These are also called base year, or BY$.) It is well understood that an array of current, or nominal, dollars is being divided by some index representing the change in purchasing power. But the purchasing power of what?

What constant year dollars are:

A quantity of money which has had the effects of inflation, or changes in the aggregate price level of the economy at large, removed.

What constant year dollars are not:

A quantity of money normalized, whether in part or in whole, by an index which is not intended to capture the change in the aggregate price level of the economy.

Many CY$ are actually not comparable because different cost estimates are presented having been normalized with different indexes. For example, one can normalize by removing the distortions to the purchasing power in the economy at large (e.g. GDP Price Index), or with a more specific price index which could be as broad a market as the Employment Cost Index (ECI) or a narrow market such as the Purchaser Price Index (PPI) for aircraft manufacturing.

The former method provides insights into the opportunity costs of the dollars, which is general to the use of all analysts dealing in monies. The  latter normalizes by the change in the price level of a given market, however defined, and is useful for forecasting and buying power analysis.

Why make the distinction?

Using inflation to normalize to CY$ is really a schelling, or focal, point. Not only is this important for a common understanding and building of concrete terminology, but one needs to know exactly which index to use to compare different CY$.

With the GDP Price Index as the schelling point, every individual knows what index was used to normalize those dollars.

So whatever index you use to provide the most realistic cost estimate (for example, its probably a good bet to forecast manpower cost increases with the ECI and not the GDP Price Index), you must take your resulting current, or then year (TY$), dollars and normalize them back to CY$ for presentation with a measure of inflation. Normalization with any other index, or composite index, must have the interpretation clearly stated for the audience.