The news bombards you with economic facts. Listening to the financial reports is enough to make even the most sensible person scratch their heads and then just assume that the experts must be right. We hear figures all the time. Do we really know what they mean, how the experts get these numbers and what they mean to us? Discussion of the inflation rate is something that most of us hear, and shake our heads. We are taught that inflation is bad, but do you really understand what it is, or how it is even calculated?
What is inflation?
Inflation is how much something costs at one point in time, compared to another point in time. The inflation rate is a measurement of the amount of increase or decrease of a product over that period. It is expressed in percentages. Inflation rate represents the percentage cost. Inflation represents how much more money it takes to buy goods and services.
How is inflation measured?
Inflation is measured using the Consumer Price Index. This is a compiling of various items and the price is measured from year to year. To establish consistency, the organization that compiles this information is the Bureau of Labor Statistics. For instance, a gallon of milk costs $2.00 in 2002; the price for a gallon of milk in 2009 is $2.50. This represents an increase of 50 points, but in order for this to make sense, it needs to be converted to a percentage. The BLS uses a much larger sampling than one product.
Putting it all together.
So, if the inflation rate is the percentage of increase from one point of time to another. Then the mathematical formula is:
((B - A)/A) x 100
B is the CPI of the latest year
A is the CPI of the first year
To use real numbers, find the inflation rate between the dates January 2006 and January 2007.
The CPI for 2006 is 198.3
The CPI for 2007 is 202.416
The Formula is filled in as follows:
((202.416 – 198.3)/198.3) x 100
(4.116 / 100) x 100
0.04116 x 100
So the rate of inflation is 4.116% for the time period given.
Inflation does not always go up, so it is possible to have a negative inflation growth. Armed with this information, you can now evaluate what this means to you. You are now in a position to understand the numbers that are constantly thrown about on the news. Knowing how these numbers are figured increases your understanding of the economic situations before us.