Inflation Formula

What is Inflation Formula?

The rise in prices of goods and services is referred to as inflation. One of the measures of inflation is the Consumer Price IndexConsumer Price IndexThe Consumer Price Index (CPI) is a measure of the average price of a basket of regularly used consumer commodities compared to a base year. The CPI for the base year is 100, and this is the benchmark  point.read more (CPI) and the formula for calculating inflation is:

Rate of Inflation = (CPIx+1 – CPIx ) / CPIx

Where,

  • CPIx is Consumer Price Index of Initial Year
  • CPIx+1 is Consumer Price Index of next year

In certain cases, we need to calculate the rate of average inflation over a number of years. The formula for the same is:

CPIx+n = CPIx * (1+r)n

Where,

  • CPIx is Consumer Price Index of Initial Year,
  • n is number of years after the initial year,
  • CPIx+n is Consumer Price Index of n years after the initial CPI year,
  • r is the rate of interest

Explanation of Inflation Formula

In order to find out the rate of inflation for one year, follow the given steps:

Step 1: Find out the CPI of the initial year. It is denoted by CPIx.

Step 2: Find out the CPI of next year. It is denoted by CPIx+1.

Step 3: Calculate the inflation using the formula:

Inflation Equation

Multiply the above number obtained by 100, if you want the rate of inflation in percentage terms.

In order to find out the average rate of inflation over a number of years, follow the given steps:

Step 1: Find out the initial CPI.

Step 2: Find out the CPI after n years.

Step 3: Use the following formula to find out the rate of inflationFormula To Find Out The Rate Of InflationThe rate of inflation formula helps understand how much the price of goods and services in an economy has increased in a year. It is calculated by dividing the difference between two Consumer Price Indexes(CPI) by previous CPI and multiplying it by 100.read more denoted by r.

Inflation Formula (Equation)

By solving the above equation, we can find out the rate of inflation, denoted by r.

Note: Instead of the Consumer Price Index (CPI), some other measures of inflation such as the Wholesale Price IndexWholesale Price IndexThe Wholesale Price Index tracks the price movement of products in a set territory and wholesaler jurisdiction. Wholesalers provide, manage, and control commodities, usually commonly traded goods, before they are sent to retailers.read more (WPI) may be used. The steps would be the same.

Inflation-Formula

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Examples of Inflation Formula (with Excel Template)

Let’s see some simple to advanced examples of the inflation equation to understand it better.

You can download this Inflation Formula Excel Template here – Inflation Formula Excel Template

Inflation Formula Example #1

The Consumer Price Index (CPI) for 2016 for a certain country is 147. The CPI for 2017 is 154. Find out the rate of inflation.

Solution:

Use the given data for the calculation of inflation.

ParticularsAmount
CPI for 2016147
CPI for 2017154

Calculation of the rate of inflation can be done as follows:

Excel 1.1

Rate of Inflation = ( 154 – 147 ) / 147

Rate of Inflation will be –

Inflation Formula Explanation 1.2

Rate of Inflation = 4.76%

The rate of inflation is 4.76%.

Inflation Formula Example #2

The Consumer Price Index (CPI) for 2010 is 108. The CPI for 2018 is 171. Calculate the average rate of inflation for the years.

Solution:

Use the given data for the calculation of inflation.

ParticularsAmount
CPI for 2018171
CPI for 2010108

Calculation of the average rate of inflation can be done as follow:

Inflation Formula Explanation 2.1

Here, the number of years (n) is 8.

CPIx+n= CPIx * ( 1 + r )^n

(1+r)^n = 172 / 108

1+r = ( 172 / 108 )^(1/n)

r = ( 172 / 108 )^(1/n) – 1

The average rate of inflation will be –

Excel 2.3

The average rate of inflation (r)= 5.91%

The average rate of inflation between 2010 and 2018 is 5.91%.

Inflation Formula Example #3

A common household in a country buys 3 eggs, 4 loaves of bread and 2 liters of petrol each week. The prices of these goods for 2017 and 2018 are as under:

YearPrice of 1 EggPrice of 1 Loaf of BreadPrice of Liter of Petrol
2017$4$2$2
2018$5$2$3

Calculate the rate of inflation for 2018.

Solution:

Calculation of Cost of Basket in 2017 will be –

Cost of Each Good = Price of Good * Quantity of Good
Excel 2.1.0

Cost of Basket in 2017 = $4*3 + $2*4 + $2*2

Cost of Basket in 2017 = $24 

Calculation of Cost of Basket in 2018 will be –

Inflation Formula Calculation 2.2.0

Cost of Basket in 2018 = $5*3 + $2*4 + $3*2

Cost of Basket in 2018 = $29

Calculation of the rate of inflation can be done as follows:

 Excel 3.3.0

Rate of Inflation = ($29 – $24 ) / $24

Rate of Inflation will be –

Inflation Formula Calculation 3.4.0

Rate of Inflation = 0.2083 or 20.83%

The rate of inflation in 2018 is 20.83%.

Inflation Formula Example #4

The prices of certain goods in 2016 and 2017 are as under:

YearPrice of 1 ChickenPrice of 1 Loaf of BreadPrice of 1 Book
2016513
2017624

A common household in a country buys 3 chicken, 2 loaves of bread and 2 books in a week. Calculate the rate of inflation in 2017.

Solution:

Step 1: We have to calculate the cost of a basket in 2016.

Example 4.1.0

Cost of Basket in 2016 =5*3+1*2+3*2

Cost of Basket in 2016 = 23

Step 2: We have to calculate the cost of a weekly basket in 2017.

Inflation Formula Example 4.2

Cost of Basket in 2017 = 6 * 3 + 2 * 2 + 4 * 2

Cost of Basket in 2017 = 30

Step 3: We calculate the rate of inflation in the final step.

Example 4.3

Rate of Inflation = ( 30 – 23 ) / 23

Inflation Formula Example 4.4

Rate of Inflation = 30.43 %

The rate of inflation is 30.43%.

Inflation Formula Calculator

You can use this inflation formula calculator.

CPIx+1
CPIx
Rate of Inflation Formula=
 

Rate of Inflation Formula=
CPIx+1 − CPIx
=
CPIx
00
= 0
0

Relevance and Uses

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