What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


How to Calculate Annual Inflation Over Multiple Years

Original post by Mark Kennan of Demand Media

The inflation rate measures the change in prices. As prices rise at a faster rate, the inflation rate is higher and each dollar has less purchasing power. Measuring the inflation rate can help you predict how prices will change in the future and help you budget accordingly. When calculating the annual inflation rate over multiple years, you must account for the effects of compounding interest, so you may not simply divide the total inflation rate by the number of years.

Contents

Step 1

Divide the price at the end of the period by the price at the start of the period. For example, if you wanted to measure in the annual inflation rate of gas over eight years and the price started at $1.40 and went up to $2.40, divide $2.40 by $1.40 to get 1.714285714.

Step 2

Divide 1.0 by the number of years over which inflation takes place. In this example, divide 1.0 by 8 to get 0.125.

Step 3

Raise the overall inflation rate to the power of the result using a calculator. Raising refers to using exponents. In this example, raise 1.714285714 to the 0.125th power to get 1.069696071. With a calculator, enter "1.714285714," push the exponent key (usually denoted with a "^" or a "x^y"), enter "0.125" and then push the equals key. When raising a number to a power less than 1, you get a number smaller than the original.

Step 4

Take away 1 from the result to find the annual inflation rate. In this example, subtract 1 from 1.069696071 to find that the annual inflation rate equals 0.069696071, or about 6.97 percent.


                   

Resources

References

About the Author

Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.


Advertisement