Inflation Rate Calculator
Inflation Rate:
Understanding Inflation Rate Calculation
Inflation is a measure of 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 price stability targets. An increase in the price level results in a reduction of the purchasing power per unit of money.
How is Inflation Calculated?
The most common way to calculate the inflation rate is by using a price index, such as the Consumer Price Index (CPI). The CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. To calculate the inflation rate between two periods, you compare the price index of the current period to the price index of a previous period.
The formula used in this calculator is:
Inflation Rate (%) = ((Current Price Level – Previous Price Level) / Previous Price Level) * 100
In simpler terms, we look at the price of a representative "basket of goods" in two different time periods. If the price of that same basket is higher in the current year compared to the previous year, it indicates inflation. The percentage difference tells us how much prices have increased on average.
Example:
Let's say the price of a basket of everyday goods was $100.00 last year. This year, the same basket of goods costs $110.50.
- Current Price: $110.50
- Previous Price: $100.00
Using the formula:
Inflation Rate = (($110.50 – $100.00) / $100.00) * 100
Inflation Rate = ($10.50 / $100.00) * 100
Inflation Rate = 0.105 * 100
Inflation Rate = 10.5%
This means that, on average, the prices of these goods have increased by 10.5% over the past year.