| The
following article explains how to calculate
the current inflation rate, if you know the
Consumer Price Index. If you don't know it,
you can find it here.
If you don't care about the mechanics and
just want the answer, use our Inflation
Calculator.
The Formula for Calculating Inflation
The formula for calculating the Inflation
Rate using the Consumer Price Index is
relatively simple. Every month the Bureau of
Labor Statistics (BLS) surveys prices and
generates the current
Consumer Price Index (CPI). Let us
assume for the sake of simplicity that the
index consists of one item and that one item
cost $1.00 in 1984. The BLS published the
index in 1984 at 100. If today that same
item costs $1.85 the index would stand at
185.0
By looking at the above example, common
sense would tell us that the index increased
(it went from 100 to 185). The
question is how much has it
increased? To calculate the change we
would take the second number (185) and
subtract the first number (100). The result
would be 85. So we know that since
1984 prices increased (Inflated) by 85
points.
What good does knowing that it moved 85
do? Not much. We still need a method of
comparison.
Since we know the increase in the
Consumer Price Index we still need to
compare it to something, so we compare it to
the price it started at (100). We do that by
dividing the increase by the first price or
85/100. the result is (.85). This number is
still not very useful so we convert it into
a percent. To do that we multiply by 100 and
add a % symbol.
So the result is an 85% increase in
prices since 1984. That is interesting but
(other than being the date of George
Orwell's famous novel) to most people today
1984 is not particularly significant.
calculating a specific Inflation Rate
Normally, we want to know how much prices
have increased since last year, or since we
bought our house, or perhaps how much prices
will increase by the time we retire or our
kids go to college.
Fortunately, The method of calculating
Inflation is the same, no matter what time
period we desire. We just substitute a
different value for the first one. So if we
want to know how much prices have increased
over the last 12 months (the commonly
published inflation rate number) we would
subtract last year's index from the current
index and divide by last year's number and
multiply the result by 100 and add a %
sign.
The formula for calculating the Inflation
Rate looks like this:
((B - A)/A)*100
So if exactly one year ago the Consumer
Price Index was 178 and today the CPI is
185, then the calculations would look like
this:
((185-178)/178)*100
or
(7/178)*100
or
0.0393*100
which equals 3.93% inflation over the
sample year.
(Not Actual Inflation Rates). For more
information you may check the current
Consumer Inflation Rate and Historical
Inflation Rates in table format. Or
if you believe a picture is worth a thousand
words you may prefer the Annual
Inflation Rate plotted in Chart format.
What happens if prices Go down?
If prices go down and we experienced
Price Deflation then "A" would be
larger than "B" and we would end
up with a negative number. So if last year
the Consumer Price Index (CPI) was 189 and
this year the CPI is 185 then the formula
would look like this:
((185-189)/189)*100
or
(-4/189)*100
or
-0.021*100
which equals negative 2.11% inflation
over the sample year. Of course negative
inflation is deflation.
(Not Actual CPI numbers).
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