How to calculate the annual inflation rate

The inflation is rising or generalized increase in the price of goods and services a country during a period of time. It is usually measured on a monthly and annual basis.

When the prices of goods and services increase in a general way, fewer products are acquired with the same amount of money, so that inflation translates into the loss of the purchasing power of the currency.

To measure inflation, certain indices are used, among them the GDP deflator or the Gross Domestic Product deflator and the CPI or Consumer Price Index.

The GDP deflator is basically a ratio or quotient between the nominal Gross Domestic Product or current price and the real Gross Domestic Product or constant price.

In the United States, the official source of the GDP deflator is the Office of Economic Analysis and it is the responsibility of the cabinet in economic matters of each country. It is usually published quarterly.

The CPI, on the other hand, is a price index of goods and services that are normally purchased by consumers. It is calculated using a basket of goods, which are weighted, together with their respective prices.

In the United States, the CPI is disclosed by the Bureau of Labor Statistics. The role that is transferred to the Central Banks or Census and Statistics offices in other countries. It is published on a monthly basis.

What should be the appropriate value of the inflation rate?

Inflation is necessary. A very low rate of inflation can cause stagnation in a region or country. For its part, a very high rate of inflation causes havoc to the currency and the purchasing power of the inhabitants.

The high inflation rates weaken the currency, capital markets, imports and the purchasing power of consumers.

In contrast, controlled or relatively low inflation levels can stimulate capital investment and can contribute to growth.

The negative inflation can reduce capital investment and lead to economic stagnation.

The worst scenario of inflation is represented by hyperinflation. Which is a sign that a country is going through a serious economic crisis. It occurs when a price index increases up to 50% on a monthly basis, with annual rates of up to 10,000%.

In an environment of hyperinflation, the currency loses value in hours and with it the purchasing power. There is a desire for people to spend the money as soon as possible. Salary increases must be very frequent and one of the main causes is when the government finances its spending with the printing of inorganic money or without support.

Given that the inflation rate can have such a significant impact, it is important to know what the annual inflation rate is, regardless of whether you are the owner of a company or an individual investor.

An ideal level of inflation is one that stimulates investment without affecting purchasing power and is closely linked to interest rates.

According to the website, inflation in the United States for 2017 was 2.11% and according to the Bureau of Labor Statistics of the United States, inflation measured based on the CPI in the last twelve months reached 2.8%.

How to calculate the inflation rate?

Go to the website of the Bureau of Labor Statistics. In the section corresponding to economic reports.

In the column located on the right, “Latest numbers”, select the link “Historical data” associated with “Consumer price index”.

Select “More format options”.

Select or click on the report “consumer price index for all urban consumers (CPI-U): average for the US city. UU By category of expense ”

The formula used to calculate the inflation rate is:

[(Final CPI – Initial CPI) / Initial CPI] x 100

Where “CPI” is the consumer price index. The result is expressed as a percentage.

Look at the numbers of the consumer price index (CPI) associated with the 12-month period that marks the beginning and end of the period for which you want to calculate the annual inflation rate.

For example, you might want to calculate the annual inflation rate between May 2017 and May 2018, so you should take note of the numbers 244,733 and 251,588.

Subtract the final CPI, in this case, 251,588 from the initial CPI 244,733. The result is 6,585.

Divide this result by the initial CPI (244,733) and multiply by 100. This result, 0.0281 or 2.8% is the annual inflation rate for the period you selected and which appears in the official reports.

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