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, in order to keep the economy running smoothly.
This calculator helps you estimate the average annual inflation rate based on the change in value of a sum of money or the price of a basket of goods over a specific period. It's a useful tool for understanding how the cost of living has changed over time and for making financial projections.
How it Works:
The formula used to calculate the average annual inflation rate (r) is derived from the compound annual growth rate (CAGR) formula:
Future Value = Initial Value * (1 + r)^n
Where:
- Initial Value is the starting price or value.
- Future Value is the ending price or value.
- r is the annual inflation rate (what we want to find).
- n is the number of years.
Rearranging the formula to solve for 'r', we get:
r = ( (Future Value / Initial Value)^(1/n) ) - 1
The calculator takes your inputs for the initial value, future value, and the number of years, and applies this formula to provide an estimated annual inflation rate.
Example:
Let's say a basket of groceries that cost $100.00 five years ago now costs $115.00. We can use the calculator to find the average annual inflation rate.
- Initial Value: $100.00
- Future Value: $115.00
- Number of Years: 5
Plugging these values into the formula:
r = ( ($115.00 / $100.00)^(1/5) ) - 1
r = ( 1.15^(0.2) ) - 1
r = 1.02837 - 1
r = 0.02837
Converting to a percentage, the estimated average annual inflation rate is approximately 2.84%.
function calculateInflation() {
var initialValue = parseFloat(document.getElementById("initialValue").value);
var futureValue = parseFloat(document.getElementById("futureValue").value);
var years = parseFloat(document.getElementById("years").value);
var resultElement = document.getElementById("result");
resultElement.innerHTML = ""; // Clear previous results
if (isNaN(initialValue) || isNaN(futureValue) || isNaN(years)) {
resultElement.innerHTML = "Please enter valid numbers for all fields.";
return;
}
if (initialValue <= 0) {
resultElement.innerHTML = "Initial value must be greater than zero.";
return;
}
if (futureValue <= 0) {
resultElement.innerHTML = "Future value must be greater than zero.";
return;
}
if (years <= 0) {
resultElement.innerHTML = "Number of years must be greater than zero.";
return;
}
// Calculate the inflation rate using the rearranged CAGR formula
// r = ( (Future Value / Initial Value)^(1/n) ) – 1
var inflationRate = Math.pow((futureValue / initialValue), (1 / years)) – 1;
// Format the result to two decimal places and as a percentage
var formattedInflationRate = (inflationRate * 100).toFixed(2);
resultElement.innerHTML = "Estimated Annual Inflation Rate:
" + formattedInflationRate + "%";
}
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font-family: Arial, sans-serif;
display: flex;
flex-wrap: wrap;
gap: 20px;
margin: 20px 0;
}
.calculator-inputs, .calculator-explanation {
flex: 1;
min-width: 300px;
padding: 15px;
border: 1px solid #ddd;
border-radius: 8px;
background-color: #f9f9f9;
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padding: 10px;
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}
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