\[IR=\frac{P_2-P_1}{P_1}\times100\]
Variables
IRinflation rate (%)
P1initial price level
P2final price level
Description
What is this formula?
The Inflation Rate measures the percentage change in the general price level between two periods.
It is one of the most important indicators in macroeconomics because it reflects the loss or gain of purchasing power over time.
When to use it
Use this formula when evaluating changes in consumer prices, producer prices, GDP deflators, or any other price index between two periods.
Example
Consumer Price Index in year 1:
P1 = 120
Consumer Price Index in year 2:
P2 = 126
Formula:
IR = ((P2 - P1) / P1) × 100
Substitution:
IR = ((126 - 120) / 120) × 100
IR = 5%
Result:
The inflation rate during the period is 5%.
Applications
- Inflation analysis
- Central bank policy
- Economic forecasting
- Cost-of-living adjustments
- Financial planning