How To Calculate Inflation Adjustment

Inflation is the rate of increased prices for items and services that are included in the CPI, or consumer price index. Calculating for an inflation adjustment of a certain type of goods or service means calculating how much the price has increased. Calculating for inflation adjustment is a good way to know how much more you need to pay for products or services that you regularly buy or avail of.

Below are the steps to take when calculating for inflation adjustment.

  • Find out the price of the item for the first year. You need the price of the product or service you are calculating inflation adjustment for to calculate the inflation adjustment for the succeeding years. Say, you want to calculate the inflation adjustment of fruits and vegetables, and the price is $3. Take note of the price of the product.
  • Find out the inflation rate for the first year. You can find the inflation rate of fruits and vegetables in the Bureau of Labor Statistics site. The Bureau of Labor Statistics site has the inflation rates of all products that register under the CPI. You can find various inflation or deflation rates under the database and tables tab located near the top of the website. The inflation rate for a certain type of goods or service can help you make an estimate for an inflation rate for the first year.
  • Follow the formula for determining a factoring number. Assuming that the inflation rate for the next 5 years for fruits and vegetables is %2.1. Divide that percentage by 100 and add 1. In the example we used, you divide 2.1 by 100, which gives you a result of .021. You then add 1 to the result, which gives you 1.021. This is your factoring number.
  • Get an index number. To get an index number, you multiply the factoring number by the year for which you want to calculate an inflation adjustment. Therefore, if you want to calculate for the inflation adjustment of fruits and vegetables at %2.1, and the factoring number you got was 1.021 by following the formula in step 2, you multiply 1.021 by 5, which is the years of inflation adjustment you are calculating. You get 5.015, which is your index number.
  • Multiply the product price by the index number. To find out how much fruits and vegetables will cost in the next five years, multiply the cost of the product to the index number. In the example used, the cost of fruits and vegetables is $3. Multiply 3 by 5.015, which is the index number. The result is 15.045, which is the cost of fruits and vegetables in the next 5 years with an inflation rate percentage of 2.1.

Following the steps above will give you the inflation adjustment for a certain type of item or service in the years to come. By calculating for inflation adjustment, you can effectively allot finances for a certain type of item or service. You can also estimate if your earnings are enough to buy or avail of that product or service. Calculating for inflation adjustment is one of the many ways you can effectively budget and save your earnings for the years to come.

 

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