Inflation Rate

Inflation rate is the percentage increase in general level of prices over a period. It represents the rate at which the purchasing power of money has eroded over a period.

Central banks and governments keep track of inflation rate and change monetary and fiscal policies accordingly. Together with unemployment rate, interest rate and growth rate, inflation rate communicates a lot about health of an economy.

Formula

The general economy-wide inflation rate is calculated as the rate of change in consumer price index (CPI) over a period using the following formula:

Inflation Rate =Current Period CPI − Prior Period CPI
Prior Period CPI

More specific inflation rates can be calculated depending on their intended use. Producers may calculate inflation rate applicable to them using the producer price index. A university endowment fund may calculate inflation rate relevant to it based on changes in level of professor compensation, research costs, etc.

Example

United States Bureau of Labor Statistics publishes historical CPI estimates available here.

The following table shows data extracted from the source for 2011 and 2012:

NovemberDecemberAverage
2011226.230225.672224.939
2012230.221229.601229.594
Inflation Rate Between Dec 2011 and Nov 2011 =225.672 − 226.230= -0.25%
226.230
Inflation Rate Between Dec 2012 and Dec 2011 =229.601 − 225.672= 1.75%
225.672
Inflation Rate Between Averages of 2012 and 2011 =229.594 − 224.939=2.07%
224.939

Prices actually decreased moving from November 2011 to December 2011. In the period between December 2012 and December 2011 the prices rose by 1.75%, while the average increase in price over the 2012-2011 was 2.07%.

Written by Obaidullah Jan