You keep hearing about how the rise in inflation rate is eating into the value of US dollar and creating a price hike in value of goods and services. Of course, rarely does anybody care to define what inflation rate is and how it’s measured. In this article, I provide a short guide explaining how to calculate inflation rate. As an added feature, an inflation rate calculator is also provided.
You might have heard your granddad or grandmother talking about how cheap goods and services were during their youth, compared to the skyrocketing prices of today. It’s a fact that a single dollar can buy you much lesser stuff, compared to what it would have bought you some years ago, as the rise in inflation has reduced its inherent value. What cost less than a few cents a few years ago, costs several dollars now. The causative agent of this phenomenal rise in the prices of goods and services is ‘Inflation‘.
Rising inflation rate makes every commodity costlier than before, eroding savings and purchasing power of the dollar. For those of you who are interested in understanding how an economy functions, it would be interesting to know how to calculate inflation rate. In this Buzzle article, I introduce you to the method used to calculate the rate of inflation in any economy. It will help you get an even better grasp of how the inflationary forces, which lower dollar value are measured by economists, to understand where an economy is heading. If you already know how the calculation process is executed, you can directly use the calculator provided below, to compute the inflation rate.
What is Inflation Rate?
Before we dive into the actual procedure, let me define inflation and present the formula used for inflation rate calculation. This will help you understand the underlying rationale behind the calculation. Inflation is an overall increase in the prices of all types of goods and services in a country, which results into a lowering of the purchasing power of money. Specifically, inflation rate is the percentage change in the price index over a period of a year. The price index is a weighted average of the prices of a selected basket of goods and services, which cover the whole spectrum of consumer purchases in any economy.
In the United States, the price index used for the calculation of inflation rate is the ‘Consumer Price Index’ (CPI) published by the Bureau of Labor Statistics every year. The inflation rate at any point of time can be directly calculated from the difference in the CPI value at different times. They are usually computed by measuring values a year apart. The inflation rate is obtained by dividing the change in consumer price index by the original value and expressing it in percentage. Here is the inflation rate formula:
Inflation Rate = [(Current Year CPI Value – Past CPI Value) / Past Year CPI Value] x 100
How to Calculate Inflation Rate Using CPI?
Using the formula presented above, the value of inflation rate can be directly computed. Using the calculator provided above, you can directly get the inflation rate value, once you enter the current and past value of the consumer price index. Consider for example, that the current value is 175, while the past value was 100. Then the inflation rate will be –
Inflation Rate = [(175 – 100)/100] x 100 = 75%
Thus, the inflation rate in this case is 75%, which is quite a phenomenal rise. If you check out the inflation rates by year, you will realize that CPI values do not change that drastically from year to year. When the inflation rate turns out to be negative due to a lower CPI value, compared to previous year, then it’s ‘Deflation’, which is a reduction in the prices of goods and services.
Once you have data in the form of current and past CPI values, calculation is extremely simple. The real challenge lies in creating a weighted price index, which can correctly reflect the price changes in commodities all over a market. That job is carried out by the ‘United States Bureau of Labor Statistics’, through the creation of the Consumer Price Index. Visit the organization’s website to get the latest information regarding changes in CPI and its subsequent impact on the inflation rate. Using the inflation rate calculator provided above, you can easily calculate the percentage value of inflation rate.