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:
Where,
 CPI_{x} is Consumer Price Index of Initial Year
 CPI_{x+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:
Where,
 CPI_{x} is Consumer Price Index of Initial Year,
 n is number of years after the initial year,
 CPI_{x+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 CPI_{x.}
Step 2: Find out the CPI of next year. It is denoted by CPI_{x+1.}
Step 3: Calculate the inflation using the formula:
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.
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.
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For eg:
Source: Inflation Formula (wallstreetmojo.com)
Examples of Inflation Formula (with Excel Template)
Let’s see some simple to advanced examples of the inflation equation to understand it better.
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.
Particulars  Amount 

CPI for 2016  147 
CPI for 2017  154 
Calculation of the rate of inflation can be done as follows:
Rate of Inflation = ( 154 – 147 ) / 147
Rate of Inflation will be –
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.
Particulars  Amount 

CPI for 2018  171 
CPI for 2010  108 
Calculation of the average rate of inflation can be done as follow:
Here, the number of years (n) is 8.
CPI_{x+n}= CPI_{x} * ( 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 –
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:
Year  Price of 1 Egg  Price of 1 Loaf of Bread  Price 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 Basket in 2017 = $4*3 + $2*4 + $2*2
Cost of Basket in 2017 = $24
Calculation of Cost of Basket in 2018 will be –
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:
Rate of Inflation = ($29 – $24 ) / $24
Rate of Inflation will be –
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:
Year  Price of 1 Chicken  Price of 1 Loaf of Bread  Price of 1 Book 

2016  5  1  3 
2017  6  2  4 
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.
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.
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.
Rate of Inflation = ( 30 – 23 ) / 23
Rate of Inflation = 30.43 %
The rate of inflation is 30.43%.
Inflation Formula Calculator
You can use this inflation formula calculator.
CPI_{x+1}  
CPI_{x}  
Rate of Inflation Formula=  
Rate of Inflation Formula= 


Relevance and Uses
 The rate of inflation is an important input in the monetary policyMonetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more framework by central banks. If inflation is too high, interest rates may be hiked. If inflation is too low, then central banks may lower the inflation rate.
 Intuitively, it may seem that if inflation is negative (known as deflation), it is good for the country. However, this is not true. The deflationaryDeflationaryDeflation is defined as an economic condition whereby the prices of goods and services go down constantly with the inflation rate turning negative. The situation generally emerges from the contraction of the money supply in the economy.read more situation may lead to low growth.
 In fact, having a low rate of inflation is considered to be good for the economy. However, generally, economists may not agree on the ideal rate of inflation in the economy.
 If inflation is high and volatile, it creates uncertainty about the prices of goods and services in the future. High inflation tends to discourage investment. This, in turn, reduces growth in the long run. High inflation may be caused by an increase in the money supply in the economy.
 When inflation is high, the cost of living of the wage earners increases. Hence, wage owners may demand higher wages. This, in turn, may increase the costs of goods and services, leading to more inflation. This may lead to a spiral of higher inflation.
 When inflation is too high, people may be discontented. This may lead to social and political unrest. The value of savings held by households and firms reduces in the event of high inflation. Higher inflation increases the cost of goods produced in the country. This may reduce the export competitiveness of the country.
 The nominal Gross Domestic ProductNominal Gross Domestic ProductNominal GDP (Gross Domestic Product) is the calculation of annual economic production of the entire country's population at current market prices of goods and services generated by four main sources: land appreciation, labour wages, capital investment interest, and entrepreneur profits calculated only on finished goods and services.read more (GDP) of a country is the combination of real GDP and inflation. Thus, if the nominal GDP growth is 10% and the rate of inflation is 4%, the real rate of GDP growth is approximately 6%. Thus, the real GDP growth that is widely reported is nothing but net growth.
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