How to Calculate the Inflation Rate
The inflation rate is the percentage change in a price index (like CPI) between two years.
The Inflation Rate formula
Calculator
Enter a price index for two years to get the inflation rate and whether it is inflation or deflation.
CPI₁, the starting year. This is the denominator.
CPI₂, the ending year.
The price level rose 5% between the two years.
- Change in the index
- 12
- What a $100 basket costs in the later year
- $105
- Verdict
- Inflation
How to calculate Inflation Rate, step by step
- 1Get the price index for both years. Usually the Consumer Price Index (CPI) for the earlier and later year.
- 2Subtract. Find the change: CPI₂ − CPI₁.
- 3Divide by the starting value. Divide the change by the earlier year's CPI.
- 4Convert to a percent. Multiply by 100. A negative result is deflation.
Worked example: Inflation Rate
If CPI was 240 last year and 252 this year, inflation = [(252 − 240) ÷ 240] × 100 = 5%.
Nominal and real, and the rate that connects them
Inflation is the reason a nominal figure and a real figure are different things, and most macro questions are really asking you to move between them.
A bank paying 6% while inflation runs at 2.5% is not making savers 6% better off. The approximation everyone uses is real ≈ nominal − inflation, so about 3.5%. The exact version is (1.06 ÷ 1.025) − 1 = 3.415%, and the two answers drift apart as inflation rises, which is why the approximation is fine for AP and not for a country with 40% inflation.
The direction matters for the winners and losers question. Unexpected inflation helps borrowers with fixed-rate debt, because they repay in money worth less than they borrowed, and it hurts lenders and anyone on a fixed nominal income. Expected inflation hurts far less, because it is already priced into the interest rate.
Where it comes from, and why the two causes look different on a graph
Demand-pull inflation is too much spending chasing the output an economy can make. Aggregate demand shifts right, so the price level rises AND real output rises. Unemployment falls at the same time.
Cost-push inflation is the supply side getting more expensive, an oil shock being the standard example. Short-run aggregate supply shifts left, so the price level rises while real output FALLS. Unemployment rises at the same time.
That difference is the whole reason the distinction is taught. With demand-pull, inflation and unemployment move in opposite directions and the Phillips curve tradeoff holds. With cost-push, they rise together, the Phillips curve itself shifts, and there is no comfortable policy: fighting the inflation deepens the downturn, and fighting the downturn worsens the inflation. That is stagflation, and it is why questions about the 1970s are always cost-push questions.
Inflation Rate questions
How do you calculate CPI itself?
CPI = (cost of the market basket in the current year ÷ cost of the same basket in the base year) × 100.
What is the difference between inflation and deflation?
Inflation is a rising price level (positive rate); deflation is a falling price level (negative rate). Disinflation is a slowing positive rate.
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