Formula to Calculate the Rate of Inflation
The inflation formula rate helps us understand how much the price of goods and services in an economy has increased in a year. For example, if the price of goods and services in an economy is now $103 and in the previous year the same was $100, then the inflation is $3. Below is the given formula through which we can calculate the inflation rate.
Rate of Inflation Formula = (CPIX+1 – CPIX) / CPIX
Here, CPI x means the initial consumer index.
Table of contents
- The rate of inflation formula helps calculate the percentage increase in the overall price level of goods and services in an economy over time.
- The Consumer Price Index (CPI) is a commonly used measure of inflation that can be obtained from the Bureau of Labor Statistics report in the USA.
- Inflation is an important economic indicator as it affects the prices of consumer goods and services and the purchasing power of individuals.
- It is important to note that inflation and purchasing power are two separate concepts. Inflation can increase due to currency undervaluation or other factors.
The CPI of the previous year was $1,000 and the CPI for the current year is $1,110. Find out the rate of inflation for this year.
This example is fictitious. We took this example to simplify the understanding of the inflation rate.
- Here, we have the previous year’s CPI, $1,000.
- And, we also know the current year’s CPI, $1,110.
Using the formula, we get: –
Rate of Inflation = (CPI x+1 – CPI x) / CPI x
- i.e = ($1,110 – $1,000) / $1,000 = $110 / $1,000 = 11%.
- In a normal scenario, the inflation rate is around 2%-3%. Normally, the inflation rate does not reach 11%.
- We used the above formula’s consumer index for the previous year and the next year. Then, we found out the difference between these two.
- Later, we divided the difference by the previous year’s consumer price index.
Let us take a simple example to understand why 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. is taken.
- Every year, the government issues new notes to the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.. With the newly published notes, the value of the currency decreases. As a result, whatever was available at $100 will not be available at $100 in the next year.
- John went to the market and bought groceries for $200. He was happy as he got everything under $200.
- Next year, John went to the market again to buy the same groceries equally. He took $200 because he knew from his previous experience that they would only cost $200. But to his utter surprise, he saw that now he would need to pay $210 for the same number of groceries. This ($210 – $200) = $10 is the inflation.
- And the inflation rate in the same scenario would be = $10/$200 = 5%.
Use and Relevance of Rate of Inflation Formula
- We can gather information about the Consumer Price Index (CPI) from the released Bureau of Labor Statistics, USA report.
- It is an important measure because it affects not only the prices of consumer goodsConsumer GoodsConsumer goods are the products purchased by the buyers for consumption and not for resale. Also referred to as final products, examples of consumer goods include an Apple cellphone or a box of Oreo cookies. Consumer goods companies and the industry offer a vast range of products that heavily contribute to the global economy. and services but also the purchasing power of every customer.
- What a customer could buy in the previous year may not be available in the next year at the same prices. As a result, the cost of goods or services can increase.
- We need to remember that inflation and purchasing power are different.
- It is the rate of increase in the prices due to the under-valuation of currency. On the other hand, purchasing power is the person’s ability to buy goods and services as per their income.
Rate of Inflation Calculator
You can use the following rate of the inflation calculator:
|Rate of Inflation Formula=
Rate of Inflation Formula in Excel (with Excel template)
Let us now do the same example above in Excel.
It is very simple. You need to provide the previous year’s CPI and the current year’s CPI.
You can easily calculate the ratio in the template provided.
Frequently Asked Questions (FAQs)
The anticipated rate of inflation formula is a calculation that estimates the expected rate of inflation over a given period based on the current rate of inflation and the expected future rate of inflation.
The cumulative rate of inflation formula is a calculation that measures the total percentage increase in the price level of goods and services over a specific period, typically a year or more.
One of the main limitations of the rate of inflation formula is that it relies on a fixed basket of goods and services that may not accurately reflect changes in consumer spending patterns. Additionally, the formula may not consider changes in the quality of goods or services, which can affect their price levels. Finally, the formula may not capture inflationary pressures from factors such as changes in the money supply or supply chain disruptions, which can significantly impact prices.
This article is a guide to the Rate of inflation Formula. Here, are some examples with the rate of inflation calculator, formula, template, and uses. You may also have a look at these articles below to learn more about financial analysis: –
- Examples of Inflation Formula Examples Of Inflation FormulaThe rise in prices of goods and services is referred to as inflation. One of the measures of inflation is the consumer price index (CPI). Rate of inflation = (CPIx+1–CPIx )/CPIx. Where CPIx is the consumer price index of the initial year, CPIx+1 is the consumer price index of the following year.
- Inflation AccountingInflation AccountingInflation accounting refers to reporting financial statements by factoring in the impact of soaring or plummeting costs of various goods, adjusted according to price indexes to present a clear picture of the firm’s financial position.
- Economics vs FinanceEconomics Vs FinanceFinding the equilibrium point of demand and supply, understanding average cost and marginal cost, and other theoretical concepts are all part of economics. Finance is an extension of these concepts that focuses on money management and growth.
- MacroeconomicsMacroeconomicsMacroeconomics aims at studying aspects and phenomena important to the national economy and world economy at large like GDP, inflation, fiscal policies, monetary policies, unemployment rates.