Inflation is often a significant part of growth in any time series measured in dollars (or other currencies), or – in other words – it’s an important part of an increase over time in data expressed in dollars. So when you compare data for the current year, month or whatever with the same data for some period in the past, you may just see inflation rather than actual growth or increases. By adjusting for inflation, you uncover the real growth. You may even discover that growth hides decline. Here’s an innocuous example of the consequences of failing to adjust data for inflation:
Over the last month, newspapers and film Web sites have proclaimed Avatar the highest-grossing film in American history. … Moviegoers in [the U.S.] have now spent about $700 million on tickets to Avatar. … No. 2 on the all-time list is Titanic, which brought in about $600 million. Avatar surpassed Titanic in late January. The problem with these numbers is that they aren’t adjusted for inflation. … When you adjust movie grosses for inflation, as Box Office Mojo does, you see that “Gone With the Wind” remains the top-grossing movie of all time, with $1.5 billion in box-office sales (using today’s dollars). (source)
This won’t do much damage. The problems start when unadjusted data are being used to push a political point or legislation. For example, one can claim that it isn’t a good idea to raise gasoline taxes because gasoline prices are already very high compared to the old days, but this claim loses much of its strength when you adjust the prices for inflation and it turns out that they are actually rather average, historically.
Of course, you can make mistakes while trying to adjust for inflation, and there are several techniques available, none of which will provide the same numbers. But any adjustment, especially for comparisons over long periods of time, are better than no adjustment at all.
There’s a cool inflation adjusting tool here (only for U.S. data I’m afraid).