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Computing the Rate of Inflation or Deflation

5 March, 2015 - 16:32

The rate of inflation or deflation is the percentage rate of change in a price index between two periods. Given price-index values for two periods, we can calculate the rate of inflation or deflation as the change in the index divided by the initial value of the index, stated as a percentage:

EQUATION 20.4

Rate of inflation or deflation = percentage change in index / initial value of index

To calculate inflation in movie prices over the 2007–2008 period, for example, we could apply Equation 20.4 to the price indexes we computed for those two years as follows:

                     Movie inflation rate in 2008 = (1.06 − 1.00) / 1.00 = 0.06 = 6 %

The CPI is often used for calculating price-level change for the economy. For example, the rate of inflation in 2007 can be computed from the December 2006 price level (2.016) and the December 2007 level (2.073):

                     Inflation rate = (2.073 − 2.016) / 2.016 = 0.028 = 2.8 %