Maybe, once in our lives, we wonder why and how the prices change. Sometimes we look at the things we buy every day, and we can see that they are costlier than they have been before. Here, everything is simple – money’s value is constantly altering, and periodically the inflation happens.
In reality, inflation is considered one of the key topics in economics and the dollar’s value. And finally, no matter what age and what group we belong to, it will definitely touch each of us one day.
As all of us are customers and we need to manage our budget, we should have some vision of basic inflation. If you want to be successful in the financial aspect, you need to learn how to plan and manage the economy’s state.
That is why we are here – to help understand what inflation means and how to estimate it.
The degree of inflation – what is it?
In fact, there is no difficulty in understanding the inflation rate nature. Basically, the inflation rate signifies the numerical degree rate at which the increasing of needed items and services happens during the particular period (here, we bear in mind the increasing average cost). This increase has one main consequence – it requires more currency for buying mentioned products.
Usually indicated in percentage, this rate shows how the power of buying the state’s currency is depreciated.
The key thing that indicates inflation’s value is its affection on the economic sphere. When the products experience the average cost growth, it means that the foreign exchange depreciates and we need extra money to buy some items or services.
Let’s see it in the example. Ann spends $700 every month on food. Inflation happens, and the costs grow. That is why Ann has to spend more money to buy the same products. In this case, Ann has two ways – to divert money from her budget to buy food or to buy food of low quality and in less quantity.
So, inflation has an essential impact on the financial planning of our lives since our living cost depends on the varying of dollar’s value. Moreover, it is essential to monitor the degree of inflation, as if it is stable, the economic sphere will develop slowly because of the negative effects.
The index of consumer price
There are many methods to track the degree of inflation, and the index of consumer price is one of these methods. It is a figure that the economists take from the median cost from the alleged services and items basket that the customers buy. After the price of every taken product is changed, the specialists average them out to make a truly secure index of consumer price.
Keep in mind that there are products that experience the inflation impact (like milk, for example). But besides groceries, there are other things that are amenable to estimating. There are items that also belong to this products & services basket (and of course, to index of consumer price) – medical treatment, clothes, transport, etc. That is why you need to beware of cost growth since inflation influences them all.
At last, there is the Bureau of Labor Statistics that completes the cost of each product. So, you should thoroughly track this information, as it can help you quickly know the prices of the items.
In the end, the index of consumer prices modification plays an essential role since the economists use them in calculating the essential expenses changes. When knowing a quantifiable living cost, we can define the periods when inflation can take place.
And now, we will try to understand how we can estimate the degree of inflation.
To evaluate the degree of inflation, we need to use the formula. Usually, for this formula, the economists take the specific starting point – it can be a month or a year from the past that is taken from the index of consumer price for a specific product. Then the economists take the actual cost of a specific product and compare it with the past.
In short, to know the gap between these two figures, subtraction is used in the equation. Thanks to this difference, we will monitor the process of growing the index of consumer price for a particular product. And this, in its turn, will indicate the unavoidable inflation growth.
If you want to know the particular degree of inflation, the economists part these results by the starting cost (here, we should pay attention that it is the past cost, not the actual one). As a result, you will have a decimal, from which you can quickly get a percentage (all you need is to multiply it by 100). And this figure will show the degree of inflation.
So, the formula of inflation degree is the following:
Today’s index of consumer price – past index of consumer price ÷today’s index of consumer price X 100 = degree of inflation. Or B – A/A X 100 = degree of inflation.
Now, let’s try to know how we can calculate the rate of inflation of the specific time interval.
It can be hard to estimate the degree of inflation for a specific interval of time, but here, the index of customer price comes for help. Research the right way. You will know how you can define the rate of inflation utilizing the following figures – particular dates, index of consumer price, plus historical records of costs. Considering these instruments, you can take the following steps when estimating the degree of inflation during the specific time interval:
- Study everything: We want to emphasize that the index of consumer price is a median value; that is why the examination is essential here. Before estimating the inflation degree, we recommend ensuring that you examine the particular items. After defining the items for which you will estimate the inflation degree, collect all information about the particular period prices.
- Make up the diagram of the index of consumer price: This diagram will show you the difference between the past index of consumer price and the actual one. Besides the effectiveness of your work, it will also facilitate using the inflation degree formula that we have presented before.
- Select time interval: When making up a diagram, you need to select the time interval that is interesting for you – finishing university or retiring from work. It can even be the period from the future since you can estimate the data across any period with the formula and medial values. When you know the inflation degree of specific time intervals, it will be easier for you in the future to plan your economic life.
- Find the past and present indexes of consumer price: To apply the formula of inflation degree, you need to find the past and present dates of the consumer price index. The past index of consumer price will serve as a starting point. As for the present index, it can be the actual month, for example, or a year.
- Put the figures into the formula of inflation degree: When you have all the figures, you can estimate the degree of inflation. Applying the formula is the next - deduct the past index of the consumer price from the actual one; divide the received figure by the past index of consumer price. To get the result in percentage, you need to multiply the figure by 100.
If the result is over 100%, how to estimate the degree of inflation?
Once the middle degree of inflation gets to 100%, it signifies that the prices of specific products have doubled. To make everything obvious, the Bureau of Labor Statistics takes the new basic year when rates are increasing to more than 100%.
If you estimate the degree of inflation on your own, and the index of consumer price growth to more than 100%, all you need to deduct 100. This way, you will know how much the costs have inflated during the selected time interval. You should bear in mind that this new figure will show you growth on top of the original cost, plus the prices’ doubling.
Now, let’s see on the example how the rate of inflation is estimated:
In 2011 the bread cost $2.50; in 2021, it costs $4.35. To estimate the degree of inflation, we need to apply the formula – 4.35-2.50, and we have 1.85. After we divide 1.85 by 2.50 and we have 0,74. Then we multiply 0,74 by 100 and get 74%. So, the bread degree of inflation is 74% from 2011 till 2021.