Calculating Inflation.pptx

the method of calculation by using the Inflation Formula

1. Calculating Inflation Rate Prof. Nithin Kumar S Assistant Professor of Economics JSS Banashankari Arts, Commerce and Shantikumar Gubbi Science College Vidyagiri, Dharwad - 580004

2. Introduction Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase . We will subtract the starting price (A) from the later price (B) and divide it by the starting date (price) (A). Then multiply the result by 100 to get the inflation rate percentage. Typically, inflation happens due to an increase in production costs or an increase in demand . Mr. Nithin Kumar S 2

3. Inflation Rate Formula In order to calculate the inflation rate we have to use the inflation rate formula. This is a simple formula that allows to us to see the percentage of increase or decrease in cost between given years. The formula for the calculation of inflation rate is as follows : Mr. Nithin Kumar S 3

4. Inflation rate = (( B - A )/A) X 100 A = Starting cost B = Ending cost In the formula, A would be the starting point in the Consumer Price Index (CPI) for a specific good or service, which could either be a specific year or month . B would be the current recording in the consumer Price Index for this same good or service. Mr. Nithin Kumar S 4

5. To use the formula, subtract A from B to find out how much the price of that specific good or service has changed. Then divide the result by A (the starting price) which will leave us with a decimal number. Convert the decimal number into a percentage by multiplying it by 100. The result is the rate of inflation. Mr. Nithin Kumar S 5

6. How to Find Inflation Rate for a Period of Time Now that you understand how the inflation formula works, you might want to find out what the inflation rate was for a period of time in the past or even have an estimate of what you could be paying for something in the future. Here are the steps you can use on how to find inflation rate : Mr. Nithin Kumar S 6

7. Step 1: Decide what you want to calculate Decide which goods or services you want to analyze and the period of time you want to find out the inflation rate for. To do so, you can do your own research or gather average prices data for BLS (Bureau of labour statistics ). Mr. Nithin Kumar S 7

8. How to do it : Let's say you want to calculate the inflation rate of news paper from December 1995 to June 2020. If you go to the CPI average data for news paper, you will see that average price for a news paper was Rs . 2.518 in December 1995 and in June 2020 it was Rs . 3.198 . Mr. Nithin Kumar S 8

9. Step 2: Write Down the Information Once you have decided what you want to calculate, write it down neatly or create a chart. Make sure you have the price of the good or service for the starting date you decided on as well as the price for the later date . Mr. Nithin Kumar S 9

10. December 1995 June 2020 Rs . 2.518 Rs . 3.198 Mr. Nithin Kumar S 10

11. Step 3: Label the price points Now that you have the information written down, you will notice that the formula contains the letter A and B. Label the price for the beginning date as A, since that is the starting number in your formula. Next , label the second price as B, since that is ending number Mr. Nithin Kumar S 11

12. How to do it : December 1995 June 2020 Rs . 2.518 = A Rs . 3.198 = B Mr. Nithin Kumar S 12

13. Step 4: Plug it in the Inflation Formula The last step is to simply plug it in the inflation formula and do the calculations. You will subtract the starting price (A) from the later price (B) and divide it by the starting date (price) (A). Then multiply the result by 100 to get the inflation rate percentage . Mr. Nithin Kumar S 13

14. How to do it : Inflation rate ((B - A)/A) X 100 Inflation rate = ((3.198 - 2.518 )/2.518 X 100 Inflation rate = (0.68)/2.518) X 100 Inflation rate = (0.27) X 100 Inflate rate = 27 % Mr. Nithin Kumar S 14

15. How to find Inflation Rate using a Base year When calculating inflation from a period of time, you are finding the percentage change from the starting date, which would be your base year. However , you can use any year as a base year to calculate the inflation rate. By picking a different the index would also be considered 100 . Mr. Nithin Kumar S 15

16. Step 1: Find the CPI of what you want to calculate : Decide which goods or services you want to analyze and the years you want to find out the inflation for. To do so, you can use the historical average prices data or greater CPI data from BLS . Mr. Nithin Kumar S 16

17. If you decide you want to calculate using the average price of a good or service, you will first have to find the CPI for each of them by picking a base year and using the CPI formula: CPI = X 100   Mr. Nithin Kumar S 17

18. How to do it : Let's say you want to calculate the inflation rate of a news paper from July, 2020 to July 2021, and you pick July 2019 as your base year. If you go to the CPI average data for news paper, you will see that the average price for a news paper was Rs . 3.253 in July 2020, in July 2021 it was Rs . 3.468 and the base year price (2019) was Rs . 2.913 . Mr. Nithin Kumar S 18

19. Now you have to calculate the CPI each of these years: July, 2019 (base year): (2.913/2.913) X 100 = 100 July, 2020: (3.253/2.913) X 100 = 111 July, 2021: (3.468/2.913) X 100 = 119 Mr. Nithin Kumar S 19

20. Step 2: Write down the information Once you have found the CPI numbers, write them down neatly or create a chart. Make sure you have the CPIs for the good or service for the starting date, the later date and the base year Mr. Nithin Kumar S 20

21. Date Price CPI July, 2019 (Base Year) Rs . 2.913 100 July, 2020 Rs . 3.253 111 July, 2021 Rs. 3.468 119 Mr. Nithin Kumar S 21

22. Step 3: Label the Price Points Now that you have the information written down, you will label the CPI for the beginning date as A, since that is the starting number in your formula. Next , label the CPI for the second date as B, since that is the ending number . Mr. Nithin Kumar S 22

23. Date Price CPI July, 2019 (Base Year) Rs . 2.913 100 July, 2020 Rs . 3.253 111 = A July, 2021 Rs. 3.468 119 = B Mr. Nithin Kumar S 23

24. Step 4: Plug it in the Inflation formula Now simply plug it in the inflation formula and do the calculations. First , subtract the CPI from the beginning date (A) from the late date (B), and divide it by the CPI for the beginning date (A). Then multiply the result by 100 to get the inflation rate percentage . Mr. Nithin Kumar S 24

25. Inflation rate = (( B - A )/A) X 100 Inflation rate = ((119 - 111)/111 X 100 Inflation rate (8)/111) X 100 Inflation rate = (0.072) X 100 Inflate rate = 7.2 % Mr. Nithin Kumar S 25

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