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Rate of Inflation Formula

Updated on January 31, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

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

Rate-of-Inflation-Formula

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For eg:
Source: Rate of Inflation Formula (wallstreetmojo.com)

Here, CPI x means the initial consumer index.

Key Takeaways

  • 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.

Example

You can download this Rate of Inflation Excel Template here – Rate of Inflation Excel Template

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%.

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Brief Explanation

  • 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.read more is taken.

  • 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

Rate of Inflation Calculator

You can use the following rate of the inflation calculator:

CPIx+1
CPIx
Rate of Inflation Formula=
 

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

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.

Rate of Inflation Formula in Excel

Frequently Asked Questions (FAQs)

1. What is meant by the anticipated rate of inflation formula?

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.

2. What is meant by the cumulative rate of inflation formula?

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.

3. What are the limitations of the rate of inflation formula?

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.

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