Imagine I have income data (the data can be found below) that I want to deflated according to the RPI.
id year income
1: 1 1993 733.4651
2: 2 1997 2369.1665
3: 3 1993 1401.0778
4: 3 1994 1416.6666
5: 3 1995 1401.0778
6: 3 1996 1401.0778
7: 3 1997 1517.8086
....
year rpi defl1995
1 1993 555. 0.944
2 1994 568. 0.967
3 1995 588. 1
4 1996 602. 1.02
5 1997 621. 1.06
Compute the reference year with
rpi$defl1995 = rpi$rpi / rpi$rpi[rpi$year == 1995]
then merge
dff = merge(dff, rpi, by = c('year'))
My question is this: You would divide the income data to deflate them? Not multiply, right?
dff$income_delf = dff$income / dff$defl1995
Data
rpi = structure(list(year = c(1993, 1994, 1995, 1996, 1997), rpi = c(555.1,
568.5, 588.2, 602.4, 621.3), defl1995 = c(0.943726623597416,
0.966507990479429, 1, 1.02414144848691, 1.05627337640258)), row.names = c(NA,
-5L), class = "data.frame")
dff = structure(list(id = c(1L, 2L, 3L, 3L, 3L, 3L, 3L, 4L, 4L, 4L,
4L, 5L, 5L, 5L, 5L, 5L, 6L, 6L, 6L, 6L), year = c(1993L, 1997L,
1993L, 1994L, 1995L, 1996L, 1997L, 1993L, 1994L, 1995L, 1996L,
1993L, 1994L, 1995L, 1996L, 1997L, 1993L, 1994L, 1995L, 1996L
), income = c(733.465087890625, 2369.16650390625, 1401.07775878906,
1416.66662597656, 1401.07775878906, 1401.07775878906, 1517.80859375,
2393.61059570312, 843.074096679688, 1433.33325195312, 605.4619140625,
2133.33349609375, 2563.62280273438, 2208.33325195312, 2814.4111328125,
832.193359375, 1839.87182617188, 12673.6337890625, 0, 855.849792480469
)), row.names = c(NA, -20L), class = "data.frame")
Yes, you would divide the dff$income by dff$defl1995 to get the adjusted income in 1995 dollars.
You know that inflation is occurring since RPI is increasing in the rpi data set.
Therefore, since you're adjusting the incomes in terms of 1995 dollars, the same income amount for years before 1995 would have more buying power compared to the same income amount in 1995. Similarly, the same income amount for years after 1995 would have less buying power compared to the same income amount in 1995.
You can see this occurring for the individual with id 3. They had a constant income of $1401.078 for 1993, 1995, and 1996. However, after you adjusted the incomes, you get $1484.622, $1401.078, and $1368.051, which makes sense.