The Average Inflation Rate

To account for the effect of varying yearly inflation rates over a period of several years, we can compute a single rate that represents an average inflation rate. Since each individual year's inflation rate is based on the pervious year's rate, they have a compounding effect. As an example, suppose we want to calculate the average inflation rate for a 2-year period for a typical item. The first year's inflation rate is 4% and the second year's is 8%, using a base price index of 100.

• Step 1. We find the price at the end of the second year by the process of compounding:

• Step 2. To find the average inflation rate f over a 2-year period, we establish the following equivalence equation:

Solving for f yields f = 5.98%

We can say that the price increases in the last 2 years are equivalent to an average annual percentage rate of 5.98% per year. In other words, our purchasing power decreases at the annual rate of 5.98% over the previous year's dollars. If the average inflation rate is calculated based on the consumer price index (CPI), it is known as a general inQation rate (f).

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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