What Is Inflation Rate? - Definition & Formula

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  • 0:02 Inflation Rate Defined
  • 0:50 Inflation Rate Formula
  • 2:56 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Have you ever heard about inflation on the news? Ever wonder how inflation is calculated? In this lesson, you'll learn what the inflation rate is and how to calculate it. You'll also have a chance to take a short quiz.

Inflation Rate Defined

The inflation rate is a measurement of the rise in price of a good or service over a period of time reflected as a percentage. It is usually measured on a monthly and annual basis in the United States.

Inflation is an increase in the general level of price across a broad spectrum of products. Inflation in the U.S. is usually measured using the consumer price index (CPI). According to the United States Bureau of Labor Statistics, the CPI is 'a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.'

The opposite of inflation is deflation, which is a decrease in the general price level for goods and services. It's basically a negative rate of inflation.

Inflation Rate Formula

In order to calculate the inflation rate for any product or service, you will need the price of the goods or services for the two periods of time in question. You then use this formula to calculate the inflation rate:

Inflation Rate = ((T2 - T1) / T1) x 100

T1 = Price for the first time period (or the starting number)
T2 = Price for second time period (or the ending number)

Here's an example. Let's say that the price of a 32-inch flat screen television was $400 last year but is $410 this year. What's the annual rate of inflation for 32-inch flat screen televisions?

Inflation Rate = ((T2 - T1) / T1) x 100

Inflation Rate = ((410 - 400) / 400) x 100

Inflation Rate = (10 / 400) x 100

Inflation Rate = 0.025 x 100

Inflation Rate = 2.5%

You can also use this formula to calculate the general rate of inflation by plugging in the CPI index number for two different time periods.

Let's look at a real-world example. In 2011, the December CPI was 225.672, and the December CPI in 2012 was 229.601. You can calculate the inflation rate from December 2011 to December 2012 by using the formula.

Inflation Rate = ((T2 - T1) / T1) x 100

Inflation Rate = (229.601 - 225.672) / 225.672) x 100

Inflation Rate = 3.929 / 225.672 x 100

Inflation Rate = 0.0174 x 100

Inflation Rate = 1.74%

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