Inflation Rate Calculator
Understanding Inflation
Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks attempt to limit inflation, and avoid deflation, with varying targets of the inflation rate. An commonly observed measure of inflation is the inflation rate, the annualized percentage change in a price index—typically the consumer price index (CPI)—over time.
How to Calculate Inflation Rate
The formula to calculate the inflation rate between two periods is as follows:
Inflation Rate = [(Value in Later Year – Value in Earlier Year) / Value in Earlier Year] * 100
Where:
- Value in Later Year: The price or value of an item or a basket of goods in the more recent period.
- Value in Earlier Year: The price or value of the same item or basket of goods in the earlier period.
This calculation essentially measures the percentage change in value from the earlier period to the later period, indicating how much prices have increased (or decreased, if the result is negative) over that time.
Example Calculation
Let's say you want to find the inflation rate between two years. In the earlier year, a basket of goods cost $100.00. In the later year, the same basket of goods costs $105.50.
- Value in Earlier Year = $100.00
- Value in Later Year = $105.50
Using the formula:
Inflation Rate = [($105.50 – $100.00) / $100.00] * 100
Inflation Rate = [$5.50 / $100.00] * 100
Inflation Rate = 0.055 * 100
Inflation Rate = 5.5%
This means that the general price level increased by 5.5% between the two years.