The Dow Jones Average closed at an historic high yesterday…maybe.
Yes, 14,253.77 was higher than ever. However, if we remember inflation, then the most recent Dow high was during 2000.
Let’s start with the numbers we are used to hearing. At 14,253.77, the Dow surpassed its most recent peak in 2007. Even more happily, that measure of the Dow indicates a 22% increase since 2000.
But is the Dow really soaring?
Using 1994 inflation adjusted dollars shown by the black line, the last Dow high was really January 14, 2000. If we stick with the nominal numbers that we hear daily, then the Dow has to touch 16,052.22 to really hit its historic peak. Alternatively, again with those 1994 prices, we could say that the Dow’s high, 13 years ago, was 10,424.28. That means the current Dow would be 9256.38.
Why care? If your portfolio increases by 10% and prices increase by 10%, then your purchasing power has gone nowhere. On the other hand, under the mattress would have been much worse.
Sources and Resources: I especially liked and used for this post a WSJ.com article with the ideal discussion of inflation and the Dow but it is gated. Easily accessible, this Planet Money blog discusses inflation and also points out Dow index problems.