- What is Macroeconomics?
- The Top 10 Economic Indicators
- Lagging Indicators
- Economic Factors
- GDP Formula
- Real GDP
- Nominal GDP
- GDP Deflator
- Nominal GDP vs Real GDP
- GDP vs GNP
- CRR vs SLR
- Budget Deficit
- Trade Deficit
- Balance of Payments Formula
- Monetary Policy
- Fiscal Policy
- Fiscal Policy vs Monetary Policy
- Real Interest Rate
- Nominal Interest Rate
- Nominal Interest Rate Formula
- Consumer Price Index (CPI)
- WPI vs CPI
- CPI vs RPI (Top Differences)
- Current Account vs Capital Account
- Current Account Formula
- Balance of Trade
- Balance of Trade vs Balance of Payments
- Bank Rate vs Repo Rate
- Inflation vs Interest Rate
- Repo Rate vs Reverse Repo Rate
- Open Market Operations
- Expansionary Monetary Policy
- Contractionary Monetary Policy
- Recessionary Gap
- Rate of Inflation Formula
- Cost Push Inflation
- Deflation vs Disinflation
- Inflation vs Deflation
- Foreign Direct Investment
- Normative Economics
- Positive Economics
- Positive Economics vs Normative Economics
- Quantitative Easing
- Differences between Economic Growth and Economic Development
- Economics vs Business
- Structural Unemployment
Rate of Inflation Formula
The rate of inflation 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.
We can calculate the rate of inflation formula –
Here, CPI x means initial consumer index.
Example of Rate of Inflation Formula
Let’s take a simple example to illustrate the rate of inflation.
The CPI of the previous year was $1000 and the CPI for the current year is $1110. Find out the rate of inflation for this year.
This example is a fictitious one and we took this example to simplify the understanding of the rate of inflation formula.
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- Here we have the previous year’s CPI, i.e. $1000.
- And we also know the current year’s CPI, i.e. $1110.
Using the formula of rate of inflation, we get –
Rate of Inflation formula = (CPI x+1 – CPI x) / CPI x
- Or, Rate of Inflation = ($1110 – $1000) / $1000 = $110 / $1000 = 11%.
- In a normal scenario, the inflation rate is around 2-3%. Normally, the inflation rate doesn’t reach 11% at all.
Explanation of Rate of Inflation Formula
- In the above formula, we used the consumer index for the previous year and the next year and then we found out the difference between these two.
- Later, we divided the difference by the previous year’s consumer price index.
- Every year, the government issued new notes into the economy. With the newly issued notes, the value of the currency decreases. As a result, whatever was available in $100 wouldn’t be available at $100 in the next year.
- John went to the market and bought groceries for $200. He was happy because, under $200, he got everything.
- Next year, John has gone to the market again to buy the same groceries in equal amount. 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 amount of groceries. This ($210 – $200) = $10 is the inflation.
- And the rate of inflation in the same scenario would be = $10/$200 = 5%.
Use of Rate of Inflation Formula
- We can gather the information about the Consumer Price Index (CPI) from the report released by the Bureau of Labor Statistics, USA.
- The rate of inflation is an important measure because it affects not only the prices of consumer goods and services; it also affects the purchasing power of every customer.
- What a customer could buy in the previous year wouldn’t be available in the next year under the same prices. The price of the goods or services will increase.
- One thing we need to keep in mind is that the rate of inflation and the purchasing power aren’t the same things.
- The rate of inflation 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 his/her income.
Rate of Inflation Calculator
You can use the following Rate of 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.
This is very simple. You need to provide the two inputs of previous year’s CPI and current year’s CPI.
You can easily calculate the ratio in the template provided.
This has been a guide to Rate of inflation Formula, practical examples, and rate of inflation calculator along with excel templates. You may also have a look at these articles below to learn more about Financial Analysis –