The inflation rate is an important economic indicator that allows you to get an idea of the dynamics of prices for products and services, as well as the decline in the real value of money over the course of a year or several years. You can measure the rate of inflation growth using economic formulas. To do this, it is enough to have statistical information about the general price level that was valid in a specific period of time.
Several economic indicators are used to measure inflation. The most popular are two: the consumer price inflation index and the GDP (gross domestic product) deflator. The first shows the rate of inflation growth at the level of the daily needs of the population, and the second indicator measures inflation within the national economy.
Measuring the rate of inflation growth using price indices
The consumer price inflation rate is expressed as a percentage value, which shows the level of price change in the current period compared to the previous period.
To determine the inflation rate using price indices, the following formula is used:
(Price level of the current period - Price level of the previous period): Price level of the previous period x 100%
The basis for calculations is usually the cost of a standard consumer basket as the price level. It should include the same set of goods and services for the reporting and base period.
An example of calculating the inflation rate for 2010:
• The cost of the consumer basket for 2010 - 8014 rubles. 17 kopecks
• The cost of the consumer basket in 2009 - 7292 rubles. 01 kopecks
The inflation growth rate in 2010 is equal to:
(8014, 17 - 7292, 01): 7292.01 x 100% = 9.9%
With the help of such a calculation, you can measure the rate of inflation growth for any period - month, quarter, year or several years. The value of the price level can also have any structure. For example, if it is necessary to calculate the growth rate of inflation for food, this indicator will include only the cost of the food basket. Likewise, you can measure the inflation rate for any other goods or services.
Calculating the inflation rate using the growth rate of the GDP deflator
The GDP deflator is defined as the ratio of nominal to real GDP, expressed as a percentage. Nominal GDP is the gross domestic product expressed in prices of the current year. Real GDP is the gross domestic product expressed in the prices of the previous (base) year.
The GDP deflator does not allow to fully track the real dynamics of consumer prices, since the value of the gross domestic product includes all goods and services of the national economy. However, the inflation rate is quite often calculated based on this indicator. For this, the following formula is applied:
(GDP deflator in the reporting period - GDP deflator in the base period): GDP deflator in the base period
The resulting value makes it possible to measure the rate of inflation growth, based on the general level of prices of the national economy, and thereby trace the dynamics of their change.
