Inflation Rate
The rate at which the general price level rises over time.
Formula
Variables
Example
CPI 262 vs 250: (12/250) = 4.8%
How it works
This formula measures how much a price index has changed relative to its earlier value, then expresses that change as a percentage. It works by taking the increase in the index (current minus prior), dividing by the prior index so the change is measured against the original level, and multiplying by 100 to convert the result into percent. A positive answer means prices rose overall; a negative answer means the general price level fell.
When to use it
Use this when you want to compare inflation between two time periods, such as from one month to the next or one year to the next. It is common in economics, finance, and policy analysis when working with CPI or another price index.
Worked example, step by step
Suppose the CPI was 198 last year and 207 this year. Step 1: Identify the values: CPI_0 = 198, CPI_1 = 207 Step 2: Find the change in the index: 207 - 198 = 9 Step 3: Divide by the prior index: 9 / 198 = 0.04545... Step 4: Convert to a percentage: 0.04545... × 100% = 4.545... Step 5: Round reasonably: inflation rate ≈ 4.5%
Common mistakes to avoid
- Dividing by the current CPI instead of the prior CPI
- Forgetting to multiply the decimal result by 100 to get a percentage
- Using the wrong time order and reversing CPI_1 and CPI_0
Did You Know?
At 7% annual inflation, prices double in about a decade — an application of the rule of 72.
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