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 Index The 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 = (CPI_x+1 – CPI_x ) / CPI_x

Where,

CPI_x is Consumer Price Index of Initial Year
CPI_x+1is 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:

CPI_x+n = CPI_x * (1+r)ⁿ

Where,

CPI_x is Consumer Price Index of Initial Year,
n is number of years after the initial year,
CPI_x+nis 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 Inflation The 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 Index The 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.

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
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.

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.

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 Each Good = Price of Good * Quantity of Good

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=

CPI_x+1 − CPI_x
	=
CPI_x

0−0
	=	0
0

Relevance and Uses

The rate of inflation is an important input in the monetary policy 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 deflationaryDeflationary Deflation is a decrease in the prices of goods and services caused by negative inflation (below 0%). It usually results in increased consumer purchasing power, owing to a simple supply and demand rule in which excess supply leads to lower prices.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 Product Nominal 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.

19th/20th September 2020	Saturday - Sunday	9 am IST to 5 pm IST
26th/27th September 2020	Saturday - Sunday	9 am IST to 5 pm IST

Inflation Formula