Inflation Rate
What is Inflation Rate?
Inflation rate is the percentage change in CPI.
The inflation rate is the percentage change in the CPI over a period of time, usually a year. It is calculated by comparing the current CPI to the CPI in a previous period. The inflation rate is an important economic indicator, as it helps to measure the rate at which prices are rising or falling. A high inflation rate can have negative effects on the economy, while a low inflation rate can be beneficial for economic growth and stability.
Inflation Rate: a worked example
A market basket costs $250 in the base period, so its index is set at 100. Several periods later the same basket costs $265, making the index 265 divided by 250, times 100, which equals 106. The index one period before that stood at 102. Apply the formula: (106 minus 102) divided by 102, times 100. That is 4 divided by 102, or about 0.039, which becomes 3.92 percent. Note the denominator is 102, the earlier index, not 106. Now run it forward. If the index next climbs to 111.3, the inflation rate is (111.3 minus 106) divided by 106, times 100, or 5.0 percent. Each calculation uses the starting value of its own interval in the denominator, which is why one index series produces a different rate for every pair of periods.
The mistake students make with inflation rate
Reading the index level as though it were the inflation rate is the slip to watch for. A CPI of 106 means 6 percent inflation only when the comparison period is the base period, where the index equals 100. If the index read 102 last period and 106 now, the rate for that period is 4 divided by 102, or 3.92 percent, and the 6 percent figure is the cumulative rise since the base period instead. Check which two periods a question is comparing before touching the formula, because an index number on its own is a level, not a rate of change.
Inflation Rate questions
How do you calculate the inflation rate from CPI?
Subtract the earlier CPI from the later CPI, divide by the earlier CPI, then multiply by 100. Written out, the inflation rate equals (CPI in period two minus CPI in period one) divided by CPI in period one, times 100. Moving from a CPI of 200 to 210 gives 10 divided by 200, or 0.05, which is 5 percent. The earlier figure always goes in the denominator, and the result is a percentage, not a decimal.
Can the inflation rate be negative?
A negative inflation rate is possible and has its own name, deflation. Plugging a CPI that fell from 130 to 127.4 into the formula gives (127.4 minus 130) divided by 130, times 100, or negative 2 percent. A negative rate means the average price of the basket actually dropped. A positive but shrinking rate is not negative inflation, it is disinflation, and the two are graded as different answers.
Does the base year affect the inflation rate you calculate?
Changing the base year rescales every CPI figure but leaves the inflation rate between any two periods unchanged, because both the numerator and the denominator scale by the same factor. An index of 100 rising to 110 gives 10 percent, and rebasing so the same two periods read 200 and 220 still gives 20 divided by 200, or 10 percent. The base year only fixes which period the index equals 100, not how fast prices move.
Formula / Example
Related terms
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated