How to Calculate Inflation Rate

What is inflation? It reminds me the ‘Kempen Inflasi Sifar’ (Zero Inflation Campaign) launched by government more than 10 years ago… TV ads, posters, and banners are everywhere during the campaign, still remember?

ZERO INFLATION = NO PRICE INCREASED

If we are talking about one or two items within a year, maybe, but over the years, that are impossible, right? Suddenly I feel to scratch my head and wondering why we go toward something that is impossible to be achieved? Hmmm…

DEFINITION OF INFLATION RATE

In mainstream economics, the word “inflation” refers to a general rise in prices measured against a standard level of purchasing power. Previously the term was used to refer to an increase in the money supply, which is now referred to as expansionary monetary policy or monetary inflation. Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality. There are, therefore, many measures of inflation depending on the specific circumstances. (Source: Trading Economics)

FORMULA FOR INFLATION RATE

Rate of Inflation,
= (P0 – P1) / P1 x 100%

P0 = current average price level
P1 = price level a year ago

(Formula Source: Wikipedia)

Example:

1 January 2006
Restaurant Ali – Chicken Rice = RM4.00
Restaurant Meng – Chicken Rice = RM4.50
Restaurant Mutu – Chicken Rice = RM4.80

Average Price For Chicken Rice on 1 January 2006,
= (RM4.00 + RM4.50 + RM4.80) / 3
= RM4.43 per plate

1 January 2011
Restaurant Ali – Chicken Rice = RM4.50
Restaurant Meng – Chicken Rice = RM5.00
Restaurant Mutu – Chicken Rice = RM5.50

Average Price for Chicken Rice on 1 January 2011,
= (RM4.50 + RM5.00 + RM5.50) / 3
= RM5.00 per plate

Rate of Inflation,
= (5 – 4.43) / 4.43 x 100%
= 12.86% (5 years)
= 2.57% per annum

Disclaimer: Above formula was elaborated based on my personal understanding, mainly for my own study purposes. Please refer to the related source / expert for clarification purpose.