The formula for calculating the inflation rate is generally expressed as: Inflation = ((CPIx+1 – CPIx) / CPIx) x 100
Here's a breakdown of the formula:
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CPIx+1: This represents the Consumer Price Index (CPI) in the later period (e.g., next year, next month). The CPI is a measure of the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
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CPIx: This represents the Consumer Price Index (CPI) in the earlier period (e.g., this year, this month). This serves as the base period for comparison.
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(CPIx+1 – CPIx): This calculates the difference in the CPI between the two periods. This shows the absolute change in price levels.
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(/ CPIx): Dividing the difference by the CPI of the earlier period normalizes the change, expressing it as a proportion of the initial price level.
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x 100: Multiplying by 100 converts the proportion into a percentage, giving the inflation rate.
In simpler terms:
Inflation Rate = ((New CPI - Old CPI) / Old CPI) * 100
Example:
Let's say the CPI for January 2023 (CPIx) was 280, and the CPI for January 2024 (CPIx+1) is 288.4.
Inflation Rate = ((288.4 - 280) / 280) 100
Inflation Rate = (8.4 / 280) 100
Inflation Rate = 0.03 * 100
Inflation Rate = 3%
This means the inflation rate between January 2023 and January 2024 was 3%. Prices, on average, increased by 3% during that period.
