Calculate Inflation

Inflation is a key concept in economics that represents the increase in the price of consumer products over a period of time. It can also be used to calculate deflation, or a drop in prices. Calculating inflation requires a consumer price index or historical price records and a formula. You can use the formula to calculate inflation over almost any period of time.

Steps

Finding Essential Inflation Information

1. Look up the average prices of the several products across a few years. Inflation is calculated by comparing prices of standard goods across time -- things like a loaf of white bread or a gallon of milk. This information is either given to you in your problem ("In 1962, the cost of milk was $1.00 a gallon...") or you can look up the real-life prices on the Consumer Price Index (CPI).
   • The more data you have, the better. If you're offered sample prices on your practice problem, you must average all of the prices and use this -- don't just choose one price to compare.
   • The CPI is calculated annually based on the average price of many goods, making it far more effective than a single good.
2. Load the Consumer Price Index. This is a breakdown, by month and year, of the changes in inflation based off of the averages mentioned above. Any time the CPI is higher than the current month, it means there has been inflation. If it is lower, then there has been deflation.
   • You can also go directly to the [bls.gov/cpi US Bureau of Labor Statistics website] to download current inflation reports.
   • Inflation is calculated with the same formula in each country. Make sure you are using the same currency for all your numbers in the calculation.
3. Choose the period of time for which you will be calculating inflation. You can use months, years, or decades, as long as you clarify the period of time in your answer. Make sure you note the time frame you're measuring.
   • Inflation must be over a timeframe -- there is no such thing as "general inflation." Remember, inflation tracks the worth of money: how much you need at one time to buy a good vs how much you need during another time. You must compare the price now to the price during some other time period to get inflation.
4. Find the price of the product you're studying or the figure on the Consumer Price Index for your earlier date. Look up your first date on the CPI, or get the average of the good you're planning on calculating.
5. Find the price of the product or consumer price index figure for your later date. Now, look up or calculate the data for the current price of the object. If you're doing historical research (for example, examining inflation before and after the Vietnam War), then it can help to get data from 2-3 different years, allowing you to account for any single-year spikes in inflation that could change the overall economic trends you're studying.

Calculating Inflation

1. Learn the Inflation Rate Formula. This formula is simple. The "top" finds the difference in the CPI (rate of inflation), the bottom finds out what ratio of the total inflation that difference represents. Then you can multiply this answer by 100 to turn it into an easily-read percentage:
   • <math>\frac{Current CPI -Historical CPI}{Current CPI} * 100</math>
2. Plug the data into the formula. For example, imagine that we are calculating the inflation based on the price of bread between 2010 and 2012. For example, imagine the price of bread in 2012 is $3.67 and the price of bread in 2010 is $3.25.
   • <math>\frac{$3.67 - $3.25}{$3.67} * 100</math>
3. Simplify the problem through order of operations. Solve for the difference in price, then divide it. Multiply the outcome by 100 to get a percentage.
   • <math>\frac{$3.67 - $3.25}{$3.67} * 100</math>
   • <math>\frac{$0.42}{$3.67} * 100</math>
   • Finally, <math>Inflation = 0.1144 * 100</math>.
   • The inflation rate is 11.4%
4. Check your answer against the US government-run Inflation Calculator, which can check inflation between any two years in US history. If you're looking for perfect, real-world numbers, then go straight to the source. The calculator simply requires you to place in your amount, years to compare, and then spits out an inflation rate.
5. Know how to read inflation. This percentage means that, in current dollars, your money is worth about 12.9% less in today's dollars than they were in 2010. In other words, most products cost on average, 12.9% more than they did in 2010 (note -- this is an example, not actual data). If you had a negative number for your answer, you've been dealing with deflation, where a scarcity of cash makes your money more valuable, not less, over time. Use the formula just as you would with a positive figure.
6. Label the inflation rate according to the period of time you have calculated. The inflation is useful only when assigned to the time period. Make sure any studies, news, or problems correctly account for the exact amount of time.

Tips

• You can use the inflation calculator on the Bureau of Labor Statistics website to calculate inflation between years in the United States. bls.gov/data/inflation_calculator.htm and type in an amount of money and the period of years you want to use.

Things You'll Need

• Paper
• Pencil
• Calculator
• Consumer price index

Sources and Citations

See also

• Modify a Brief Linear Regression Model in Excel
• Make a Pie Chart
• Calculate Standard Deviation
• Calculate Range
• Find the Mode of a Set of Numbers
• Calculate Odds
• Find the IQR
• Make a Box and Whisker Plot
• Calculate P Value
• Calculate Outliers

Read more ...

What links here

• Calculate Simple Interest