What is Inflation?
Inflation is a continuous increase in the prices of goods and services. Over time, as a currency experiences inflation, it begins to lose its purchasing power. Therefore, more of this currency is required to purchase the same quantity of goods or services. Expressions like "inflation" and "decrease in the value of money" are often used interchangeably.
The persistent surge in the general price level (and not just the price level of one or two goods) characterizes inflation. This concept is crucial to economists and policymakers, and careful data analysis and complex statistical methodologies are often required to calculate the correct inflation rate in an economy.
Typically, the aim is to keep inflation low and stable, close to an annual rate of 2%. High inflation rates can adversely impact the economy, while low inflation is often a signal of economic stagnation.
How to Use an Inflation Calculator
Here's how you can calculate the rate of inflation:
Determine the time frame: Start by identifying the start and end years for which you wish to calculate inflation. For example, you could calculate inflation between 2015 and 2016.
Find the price of a basket of goods or check price indexes for the given years: Let's assume, for simplicity's sake, that the price index was 100 in 2015 and 105 in 2016.
Use the formula to calculate inflation:
Inflation = (Final Price - Initial Price / Initial Price) * 100
Initial Price is the price of the basket of goods or the price index at the start.
Final Price is the price of the basket of goods or the price index at the end.
You can find a more precise calculation using the official Consumer Price Index (CPI) in your country.
Actual Example of Using an Inflation Calculator
Let's use the example from above and calculate the inflation rate by substituting our data into the formula:
Inflation = ((105 - 100) / 100) * 100 = 5%
The calculation suggests that the inflation rate from 2015 to 2016 was 5%, implying a decrease in the value or purchasing power of the currency by 5% during this period.