Even though an inflation calculator can be easily obtained on financial institution portals, it’s important to understand the basics and methodology behind it. By determining the purchasing power your money loses over time, you are able to manage your money well.In order to calculate the inflation rate, you need an initial number, a final number, and the overall Consumer Price Index (CPI) chart between two periods, i.e., either months or years.
What is Inflation?
Inflation is an average rise in the prices of a given basket of goods and services over a period of time.
The currency unit of a country tends to buy less than it did the previous month or year, thus the decrease in purchasing power.
The inflation rate is usually expressed in percentages.
Deflation, on the other hand, refers to a decrease in prices, thus an increase in purchasing power
- An inflation calculator helps determine the average change in prices over a given period of time.
- The inflation rate is a common measure of inflation; it refers to a percentage change in CPI between given periods of time.
- Consumer Price Index (CPI) is a key macroeconomic indicator used to monitor price movements and how they affect policy decisions.(source: Kenya National Bureau of Statistics, KNBS).
- Governments use inflation between years for decision-making in economies.
- Inflation causes consumers to spend less because goods and services cost more.
- Long-term investment goals can help your money outgrow inflation.
- You can also outpace inflation by making more money, i.e. increasing your income
In this article, we shall be looking at how to calculate the inflation rate using an inflation calculator formula.
The Bible on Inflation
Ecclesiastes 7:10–12 (new international version)
Do not say, why were the old days better than these?
For it is not wise to ask such questions.
Wisdom like an inheritance, is a good thing
and benefits those who see the sun.
Wisdom is shelter
as money is a shelter,
but the advantage of knowledge is this
that wisdom preserves the life of its possessor.
What Causes Inflation?
1) Inflation occurs when there is a large supply of money in the economy.
A country, through its monetary authority, can decide to print more money, give it to its citizens, and allow much borrowing.
2) Exchange rates.
With the main trading foreign currency being the dollar, numerous fluctuations will often lead to inflation.
3 Main Types of Inflation
1) Demand- Pulls Inflation
An increase in money supply causes demand for goods and services to rise faster than the economy’s ability to produce more.
Because demand is high and supply is limited, you pay a higher price for what is available.
Increased wages and a decent amount of money in savings accounts can make people spend more, despite the rise in prices.
2) Cost-Push Inflation
When the cost of production process inputs rises, the cost of production outputs also rises.
As the cost of finished goods and services rises, so do consumer prices.
For instance, when the cost of energy and raw materials goes up, the consumer has to pay more for the product or service.
3) Built in Inflation.
Is a result of the future expectations of inflation.
Raising wages for employees in order to afford the high cost of living.
A rise in wages causes the cost of production to rise, which affects the pricing of products and services.
The Benefits of Inflation To Economy
- Inflation increases production. When an economy operates below its capacity,human resources tend not to be in use. More supply of money triggers more spending, which increases demand, which calls for more production.
- It helps to prevent investors or consumers from keeping their money in the hope of getting better deals than those that currently exist.
How To Benefit From Inflation
- When you make a long-term investment like a mortgage that has been affected by inflation, you gain from capital appreciation. Most homes are usually pushed out of the market due to high rates.
- By opening a foreign currency account and taking advantage of the currently favorable exchange rates.
What Is The Effect of Inflation To Economy?
- High costs of production, including an increase in wage demands by workers, could lead to unemployment. Since industries need to stay afloat in business, they might not be able to afford to pay many workers.
- A country’s currency weakens, and its purchasing power decreases. Even with the increased wage to cushion you from the cost of living, you face a repercussion in what you purchase.
- Massive demonstrations like previously experienced maandamanos led to the loss of billions because people stayed at home during working days.
- A shortage of goods is created because some people purchase them as their stores of wealth.
Ways of Controlling Inflation
- Monetary authorities (the Central Bank of a country) can, through policies, increase interest rates to reduce demand. This leads to slow growth in an economy and lowers inflation.
- A country can have a fixed exchange rate tied to the value of another currency or a measure of value like gold for stability.
- Increasing the rate of income tax so as to reduce spending and demand.
How Is Inflation Measured?
The consumer price index (CPI) is mostly used on a monthly basis to measure inflation.
As an individual, you will need some sort of diversified product and service.
Firstly, commodities, utilities, and services that include things like fuel, milk, cereals, vegetables, edible oils, electricity, transportation, toys, housing costs, etc. are put into consideration.
The overall impact of the price changes in these diverse products and services is then measured by allowing a single unit representation of their rise in price over a period of time in an economy.
When a single unit of money buys fewer goods and services, this indicates that there is a rise in price, thus the inflation rate.
KNBS usually does price collection during the second and third weeks of every month for CPI compilation.
Data is collected within selected retail outlets in Nairobi and other urban areas.
Recently, the Kenya National Bureau of Statistics highlighted a 7.3% annual inflation rate as measured by the CPI in July 2023, compared to 7.9% recorded in June 2023.
Also, 0.1% was highlighted as the monthly inflation rate in July 2023.
When the inflation rate falls below 0%, that becomes deflation.
How to Calculate Inflation Rate Over Time Using Inflation Calculator Formula
Calculations are usually done using the Consumer Price Index (CPI).
You can obtain a CPI chart from KNBS or create your own from the gathered information.
The Inflation Rate formula
(B-A)/A ˣ 100
A=starting number (initial CPI)-a specific year or month you chose in the past
B=ending number (final CPI)—could be the current reading of the same goods and services as of the same specific month as chosen in the initial CPI.
Now the steps to follow when using inflation calculator will include;
a) Choose a period; Determine Goods and Services
You can choose any past month or year, select a basket of goods and services you wish to evaluate, and gather their information.
b) Make a CPI Information Chart
Put the average monthly or yearly information of your selected goods and services over that period in a chart for easy readability.
But you can still get a ready CPI chart from the Kenya National Bureau of Statistics.
c) Choose a time period.
You can work backwards or forward. The information can be calculated for any given number of months or years.
Determining the inflation rate for the future may help you put up some plans like retirement and save more towards them. You may also want to learn about the trends in previous years.
d) Find Your Starting Number (Initial CPI)
From your information gathered or a CPI chart from the KNBS, locate your starting number and mark it as A as per the formula above.
e) Find Your Ending Number (Final CPI)
You can choose the current year or month as your ending number and focus on the CPI of the same goods and services. Mark it as B as per the inflation calculator formula above.
f) Work out the inflation rate using the Inflation Rate Formula.
Get your final CPI minus the initial CPI.
Divide that by the initial CPI.
Since the inflation rate is expressed as a percentage, multiply what you get by 100.
Let’s have a working example using the CPI chart 2023 and table for the year 2013 obtained from KNBS.
Worked example of inflation rate using inflation calculator
Let’s choose 134.15 as our final CPI (July 2023) and 71.44 as initial CPI
Using our inflation rate formula,
(B-A)÷A ˣ 100
Starting point/initial CPI (A) =71.44
End point/final CPI (B) = 134.15
Substituting in the formula:
(B-A)÷A ˣ 100
= (134.15-71.44) ÷71.44 ˣ100
= 62.71 ÷71.44 ˣ100
Therefore, the inflation rate between 2013 and 2023 was 87.77%
Want to know how Ksh. 1000 was affected by inflation between July 2013 and July 2023
Take the inflation rate, divide by 100, then multiply by ksh. 1000, and add what you get to ksh. 1000
= (0.87*1000) +1000
This means that:
Ksh 1,000 in July 2013 had a purchasing power of Ksh 1,870 in July 2023.A basket of goods and services that cost Ksh 1,000 in 2013 will cost Ksh 1,870 in 2023.
An inflation calculator enables you to determine the purchasing power your money loses over time.
The Consumer Price Index (CPI) chart is an important tool in calculating the inflation rate.
Consumers spend less during inflation since goods and services cost more.
Inflation is like toothpaste. Once it’s out, you can hardly get it back in again.
– Karl Pohl, former West German central banker