How is inflation rate calculated?
Inflation rate is calculated by comparing the price of a basket of goods (often measured by the Consumer Price Index or CPI) between two time periods. Subtract the older index value from the newer one, divide by the older value, and multiply by 100. This percentage shows how much purchasing power has eroded.
Formula
Inflation Rate = ((Current CPI − Past CPI) ÷ Past CPI) × 100
Worked Example
CPI was 250 last year and is 260 this year:
- Difference: 260 − 250 = 10
- Divide by Past CPI: 10 ÷ 250 = 0.04
- Multiply by 100: 0.04 × 100 = 4%
Result: The annual inflation rate is 4%.
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