Understanding Inflation Rate Formulas
There are a couple of different formulas that can be used to calculate inflation rate. While they’re suitable for different purposes, the one you pick may also depend on the information that you have available to you.
The first formula we’ll look at is best if you’re looking for the inflation rate for a specific product or service over a given period of time. In order to make this work, you’ll need the average price of the product during both years as your starting and ending point.
[ (Updated Price − Original Price) ÷ Original Price] × 100
Here are the steps to find the difference between the average price of a cup of coffee in 1992 and 2012:
- Find the average price in both years: $1.60 in 1992 and $2.62 in 2012
- Enter the data into the equation.
- Subtract the 1992 price from the 2012 price ($1.02)
- Divide the difference by the original price. ($1.02 ÷ $1.60 = 0.6375)
- Multiply the previous answer by 100 to get a percentage. (0.6375 × 100 = 63.75%)
In contrast to the above inflation rate formula, the formula the CPI uses is good for comparing goods or services in a basket for the current year to a base year in order to determine inflation. Here’s the formula:
(Current Price ÷ Base Year Price) × 100
Let’s use this formula to find the inflation rate between a base year, 2002, and now for a loaf of white bread. Here’s how it works:
- Find the average price of a loaf of white bread in 2002 ($1.02) and July 2022 ($1.72)
- Divide the 2022 average price by the 2002 average price (1.68).
- Subtract 1 (0.68)
- Multiply the result by 100. (68%)
What Is Demand-Pull Inflation?
Demand-Pull inflation is classic supply and demand-related inflation. When one toy is the hit of the holiday season, prices rise until the level of demand matches the supply the manufacturer is able to provide. One example of this might be concert or sporting event tickets — when demand is high, the cost for a ticket rises. Less desirable tickets usually have lower prices.
What Is Cost-Push Inflation?
Cost-Push Inflation is when an increase in production costs increases the cost of products and/or services. A good example of this would be the shortage of specialized computer chips for automobiles. Because chips were in short supply, the prices of both new and used cars spiked.
What Is Built-In Inflation?
Built-in inflation occurs when inflation has been high enough because of demand-pull or cost-push inflation that people start demanding higher wages to keep up. Unfortunately, this can also be the most sinister type of inflation because if people have more money, they’ll be willing to pay higher prices, and prices will keep going up.
