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How to Calculate Inflation

Inflation influences all aspects of the economy, from consumer spending and the cost of living through to  employment, interest rates and business investment. When it comes to running your business, understanding the basics of inflation is critical as it will help you to manage your money and monitor key changes in the market. The inflation rate formula, which this article explores in depth, is the principal method used to accurately calculate inflation rate.

What is inflation rate?

As we already know, inflation is the general rise in the price levels in an economy over a period of time. The inflation rate is the rate at which this happens – a measure of how fast the prices of goods and services increase. It is generally calculated on a month-to-month or year-to-year basis and is conveyed as a percentage. According to U.S Labor Department data, the current annual inflation rate for the United States is 2.6%. This is acceptable. However, if inflation rises exponentially, it can have a significant long-term impact and disastrous consequences.

Calculating inflation rate using the inflation rate formula

If you need to know how to calculate inflation rate, rest assured – it’s a simple process. To begin, you need to ascertain the consumer price index (CPI), a statistical estimate that measures the changes in the price level of a hypothetical basket of goods and services. It is calculated by taking price changes for each item and then averaging them.

The basket of goods and services could include anything from a pint of milk, clothing, or furniture to transport expenses and housing costs, to name just a few examples. It’s important to bear in mind that the CPI represents an average – not specific numbers – so always ensure you research the goods you are evaluating thoroughly.

Once you have determined the time period (this could be months, years, or even decades) and identified the past and current CPIs for a specific good or service, simply put them into the formula.

The inflation rate formula is:

Inflation Rate = Current CPI - Past CPI / Current CPI x 100

By following this equation, you will be left with the inflation rate as a percentage.

Here’s a theoretical example

For example, if a loaf of bread cost $2.30 in 2011 and $2.65 in 2021, what would the rate of inflation be? Well, the CPI of the past date is $2.30 and the CPI of the current date is $2.65, so if we utilize the formula, we get:

Inflation Rate = $2.65 - $2.30 ÷ $2.65 x 100

$2.65 - $2.30 = 0.35

0.35 ÷ $2.65 = 0.13207547

0.13207547 x 100 = 13.2%

This means that the inflation rate of a loaf of bread between 2011 and 2021 was 13.2%.

As you can see, calculating the inflation rate using the inflation rate equation is relatively straight forward. It is essential to gather all of the correct information – the type of goods or service you are evaluating, the time period and the current and past CPIs. If you prefer to use an online calculator, there are many options to explore, but as always, check that they come from a reliable source.

So, now you know how to measure inflation rate and calculate it quickly and accurately, you can apply this skill across many different areas of your business.

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