With inflation rates rising around the globe, knowing how to calculate the rate using the GDP deflator is a useful tool.
Inflation itself is the percentage change in price level from one period of time to the next.
For example, if a good or commodity cost $100 dollars in 2019 and that same good or commodity rose to $110 in 2020, then the inflation rate for 2020 would be 10 percent.
How to calculate inflation using GDP deflator
GDP deflator is a measure of price level in an economy and is measured as a ratio of nominal to real GDP.
This means that GDP deflator is calculated as nominal GDP divided by real GDP multiplied by 100.
Given that inflation is the percentage change in the overall price of an item in an economy, we can use the GDP deflator to calculate the inflation rate since its a measure of the price level.
Inflation rate is just the percentage change in GDP deflator from one period to the next.
Mathematically, we can write it as GDP deflator of year 2 subtracted by GDP deflator of year 1, divided by GDP deflator of year 1, and then multiplied by 100.
