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Calculating the Inflation Rate

The document discusses different methods for calculating inflation rate. Inflation rate is the percentage increase in average price levels from one period to another. It can be calculated by comparing the present average price of goods to the price in the previous year. There are two main methods for calculating inflation rate - using a base period where prices are compared to a set baseline, or chained measurements which adjust the basket of goods over time to account for changing prices. The base period method is most commonly used in accounting reports.

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8 views1 page

Calculating the Inflation Rate

The document discusses different methods for calculating inflation rate. Inflation rate is the percentage increase in average price levels from one period to another. It can be calculated by comparing the present average price of goods to the price in the previous year. There are two main methods for calculating inflation rate - using a base period where prices are compared to a set baseline, or chained measurements which adjust the basket of goods over time to account for changing prices. The base period method is most commonly used in accounting reports.

Uploaded by

smatish
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd

Inflation Rate is the percentage by which prices rise from their average level.

The increase in
the normal price of goods and services is termed as inflation and the rate by which it rises is the
inflation rate. If on one hand the rate of increase in price is termed as inflation rate, on the
other hand the decrease in the purchasing power of the masses is also termed as the inflation
rate. With the increase in the prices the money supply increases and the supply of goods
decreases. The inflation rate therefore is the rate at which all these things take place. It is thus
the measure of the decrease and the increase of various factors that affect the economy of a
country.

Normally the time for which it is counted is of one year but it is also counted in less than one
year. For this reason it is termed as the 'annualized number' .

Calculation of Inflation Rate


The real interest rate is calculated with the help of this inflation rate which is a variable. The real
increase in the wages is also counted by taking into account the inflation rate. Normally the rate
of inflation is stated in seasonally adjusted terms. The inflation rate can be subtracted from
some other rate to find out another rate which is significant for the economy.

Inflation Rate = (Po- P-1)* 100 / P-1 In this equation Po is the present average price and P-1 is
the price which was existing last year. The equation displayed here shows how to calculate the
inflation rate.

There are several other ways of calculating the inflation rate. One of them is to apply the Log
rule. One can do it by retaining the same formula and just apply the log rule to calculate it. The
inflation rate is again stated as a percentage.

Methods of Calculating Inflation Rate


Two general methods are followed while calculating the inflation rate. They are:

• One method is to use the Base Period


• The other is to use the Chained Measurements

Chained measurements adjust the prices along with other contents of the market basket
involved in the economic transaction. It also take into account individual time period in which
the prices falter. The base period process is however the common method used to calculate the
inflation rate. The implementation of this method is very common and could be traced in the
reports that are prepared by accountants. It could be traced from the 'relative weight' ascribed
to each element.

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