How to Calculate Inflation Rate From CPI

How to Calculate Inflation Rate From CPI
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The Consumer Price Index, or CPI, is a tool used to measure how much in dollars consumers need to spend to buy a typical assortment of goods. It's commonly used to measure inflation by showing how prices change over time, and you can use a common inflation rate formula with the CPI to determine how many dollars from a historic year are worth today. Use an online Consumer Price Index calculator to do the calculation, or find CPI numbers and do the math yourself.

Understanding the Consumer Price Index

Prices for common consumer goods, from golden delicious apples to Apple iPhones, don't stay the same over time. Typically, in the long run, the prices of goods in dollars rise; this is known as inflation. Prices paid for various services, including wages, also typically rise with inflation.

The federal Bureau of Labor Statistics attempts to measure how consumer prices change over time by tracking what it calls the Consumer Price Index, which shows how prices for a typical "basket" of goods changes over time. The BLS monitors prices of common consumer goods and services in stores and weighs them together to produce the Consumer Price Index.

Yearly and Regional Data

The CPI for a given year is usually published as a percentage of a particular year, called the base year, so that the CPI for that year is listed as 100. By definition, years with higher prices will have CPI numbers higher than 100, and those with lower prices will have CPIs lower than 100.

BLS also publishes CPI data for particular regions of the countries and major metropolitan areas, including New York, Chicago and Los Angeles. Prices can fluctuate at different rates in different parts of the country.

The Inflation Rate Formula

If you want to determine the effect of inflation between two years, you can divide one year's CPI number by another. That will tell you how much a dollar from one year would be worth in another year's dollars.
For example, if the CPI number for an earlier year is 100, and for a later year is 133, a dollar from the earlier year would be the equivalent of $1.33 in the second year.

This is useful for understanding dollar amounts in older publications and records, such as if you want to understand how the price of an item like a car or a house has gone up over time. You can look up historic CPI numbers online and compute the formula yourself, or use an online Consumer Price Index calculator provided by the BLS or another source to do the calculation for you.

Limitations of the CPI Formula

Not all goods and services increase in price at exactly the same rate, since the published inflation rate is essentially an average of numerous types of goods and services. For example, education and healthcare have historically increased faster than the official inflation rate, while other items like television sets have increased at a slower rate.

The CPI formula also doesn't address the rate at which wages rise or fall, so it doesn't tell you how the average worker's spending power has risen or fallen. The U.S. CPI is only valid for the United States. Different countries and currencies have different inflation rates, so you can't use CPI numbers from one country to study inflation in another jurisdiction. Many countries publish their own inflation numbers.

Additionally, the CPI is only designed to be used to track consumer prices. Other indexes, like the Producer Price Index, are better suited to tracking wholesale prices and prices of raw materials paid by businesses.