How do you calculate the rate of inflation?

The Inflation Rate Formula & How to Calculate It

What Is The Inflation Rate Formula?

Inflation Rate = ((B-A)/A) x 100. In this post, we’ll explain the different components of the inflation rate and what it tells you about the economy. 

You might’ve heard your grandparents talk about how the prices of goods and services used to be way cheaper.

Understanding inflation is important because it impacts every aspect of the economy, from consumer spending to investment returns.

Since consumer prices are expected to rise 4.8% within the next year, meaning you will soon be paying more for things such as housing and groceries, learning what to expect from the future can help you better manage your finances. 

What is the Inflation Rate?

The inflation rate refers to the rate at which inflation is increasing over a specific period. This rate reflects the relationship between currencies.

value and the cost of goods and services.

Inflation is the concept that the prices of goods and services increase over time, reducing the value of the currency.

As a consumer, you are participating in the economic cycle, and knowing the basics of inflation is important for you to understand how the cost of living fluctuations impact your wallet over time.

Why Inflation Happens

The changes in prices due to inflation can occur in every industry, and at any time. Typically, inflation happens due to an increase in production costs or an increase in demand.

Price fluctuations can happen for a variety of reasons, such as excess printing of the dollar, and sometimes the price of one good will rise and another could drop.

Generally, the many factors that can cause inflation can be classified into three categories:

Demand-Pull Inflation. 

When there is more of a demand for goods and services than what the economy can produce.

Cost-Push Inflation 

When the costs to produce goods and services increase, causing the prices for those goods and services also increase.

Built-In Inflation

When workers expect their salaries to increase to maintain their living costs because the prices of goods and services have increased. These workers constantly anticipate prices to rise and demand higher salaries, which contributes to the prices of goods and services rising.

The Consumer Price Index

The most common index and indicator of inflation are the Consumer Price Index (CPI). Which is completed by the US Bureau of Labor Statistics.

The CPI is used to assess the changes in the cost of living over time. The price of each item — such as milk, eggs, energy, clothing, transportation, and medical expenses — is taken and averaged every month. Then the CPI is calculated by dividing the price of a market basket in a particular year by the price of the same basket in the base year. 

What Is CPI Formula?

Consumer Price Index Formula = Value of Market Basket in a Given Year / Value of Market Basket in the Base Year x 100.

The Consumer Price Index is based on the index average from 1982 until 1984, which was set at 100.

Inflation Rate Formula

To calculate the inflation rate, you have to use the inflation rate formula. This is a simple formula that allows you to see the percentage of increase or decrease in cost between given years. Once you understand the inflation rate, it’s easier to create a budget.

To use the formula:

Subtract A from B to find out how much the price of that specific good or service has changed.

Then divide the result by A (the starting price) which will leave you with a decimal number.

Convert the decimal number into a percentage by multiplying it by 100. The result is the rate of inflation!

How to Find Inflation Rate for some time

Now that you understand how the inflation formula works, you might want to find out what the inflation rate was for some time in the past or even have an estimate of what you could be paying for something in the future.

Step 1: Find the CPI of What You Want to Calculate.  

Decide which goods or services you want to analyze and the years you want to find out the inflation for. To do so, you can use the historical average prices data or gather CPI data from BLS.

If you decide you want to calculate using the average price of a good or service, you will first have to find the CPI for each of them by picking a base year and using the CPI formula: 

Value of current market basket

CPI = –––––––––––––––––––––––––––––––– X 100

Step 2: Write Down the Information

Once you have found the CPI numbers, write them down neatly or create a chart. Make sure you have the CPIs for the good or service for the starting date, the later date, and the base year.

Step 3: Label the Price Points

Now that you have the information written down, you will label the CPI for the beginning date as A, since that is the starting number in your formula. Next, label the CPI for the second date as B, since that is the ending number.

Step 4: Plug It in The Inflation Formula

Now simply plug it in the inflation formula and do the calculations. First, subtract the CPI from the beginning date (A) from the later date (B), and divide it by the CPI for the beginning date (A). Then multiply the result by 100 to get the inflation rate percentage.

How to do it

Inflation Rate = ((B – A) / A) x 100