It is relatively simple to calculate the inflation rate formula. In an economy, the upwards price movement of services and goods is defined as inflation. This refers to your dollar’s value. In periods when inflation rises, the dollar is not worth as much. On the other hand, the dollar is worth more in periods of an inflation decline. You might hope for periods of rising inflation when you are planning to pay back a creditor. However, unless your income is going upwards at the same rate, this won’t really benefit many pocket books. When buying a house or researching investments, it is a good idea to factor in rates of inflation to make better assessments of your return. For instance, a certificate of deposit that pays four per cent over four years with an inflation rate at four per cent has the equivalent of zero per cent. Here is a course you might be interested in entitled Silver, Gold and Inflation which reveals how inflation in an economy destroys wealth and savings. You might also want to check out this course entitled Interest Rate Swaps that analyze various pricing, valuation and applications.

## Formula for Inflation Rate

The formula for the inflation rate is [(T1-T0)/T0] x 100. This is based on doing a calculation on the difference between prices in 2 periods of time. T0 is the starting price time period and T1 is the price in the ending period of time.

## Basis for Comparison

The next thing you need to do is to determine a comparison basis. Every month, the Consumer Price Index is published by the Bureau of Labor Statistics. It was in 1984 that the index was first published and this was at 100. If the price rose from a dollar in that year to two dollars today, the index would have a value of two hundred.

## Calculate Price Difference

The first part of the formula is to calculate the price difference. If the value of the index changes from one hundred to two hundred, there is a 100 difference. Use the first price to divide the increase. Both the first price and the increase equal 100. Dividing both this numbers gives you 1.

## Calculate in Periods of Inflation Decline

You can calculate the inflation rates in a declining period. Deflation happens when there are falling prices. There is the same formula used but the change in per cent will be a negative number. For example, if the index of CPI fell from 120 (T0) to 110 (T1) in just twelve months, the formula would be:

(110-120)/120. When you multiply this number by 100, it will render negative ten per cent, which is your deflation rate.

## A Note on Measuring Inflation

For statisticians, measuring inflation is a must. To do this, a number of goods that represent the economy are collected in a ‘market basket.’ Over time, the basket’s costs are compared. The price index results, which is the current cost of the market basket as a per cent cost of the same basket in the year beginning. In North America, there are 2 main indexes of price that measure inflation. Producer Price Index (PPI) is an index measuring average changes over time in a selling price by domestic services and goods producers. These measure the change in price from the seller’s perspective. You can find PPI data for the USA at the Bureau of Labor Statistics. The measure of changes in price of consumer goods such as in services such as automobiles, clothing, food and gasoline is called Consumer Price Index (CPI). Price change is measured from the perspective of the purchaser. It is also at the Bureau of Labor Statistics that you can find CPI data. Here is a course entitled Capitalism in Crisis: The Global Economic Crisis Explained which you might want to check out. You might also be interested in this article entitled Consumer Price Index: How Much Did You Say It Was, which explains how CPI is calculated.

Basically you can think of a price index as giant surveys. Every month, the Bureau of Labor Statistics of the USA contacts thousands of doctor’s offices, rental units, service establishments and retail stores to obtain information on the price of thousands of items used to measure and track changes in price in the CPI. They record about 80,000 prices each month, representing a scientifically selected price sample paid by consumers for purchased service and goods. Various CPI and PPI’s show similar inflation rates. In the short run, this is not the case as often, there is an increase in PPI’s before CPI. Generally, investors follow PPI’s less than CPI. Here is a course entitled How the Economy Really Works which helps you understand how the government manages the economy in the 21st century.

Page Last Updated: February 2020

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