Sunday, November 04, 2007

What is the Inflation Rate?

It may not be as obvious as you would think. The CPI was 207.917 in August and 208.490 in September. The 208.49 means that what cost $100 in 1983 now costs $208.49. Since 208.49/207.917 = 1.00276, prices were up .276%. If that happens for 12 months, the inflation rate would end up being 3.36%.

But that is based on just one month. In September 2006, the CPI was 202.9. That means that prices went up 2.76% in the last 12 months. In all of 2006, they were up 2.5%. So far in 2007, they are up 3.3%. The CPI was 201.8 in December of 2006. Since 208.49 (the Sept 2007 CPI) divided by 201.8 =1.033, we get a 3.3% increase. That works out to .364% per month. If we get that increase over 12 months, the inflation rate would be 4.4%.

How could they have gone up 2.76% over the last 12 months while they might go up 4.4% for all of this year? Prices fell in the last few months of 2006. The same thing happened in 2005. Both of those years we were headed to 4-5% inflation but prices fell the last few months to give us a decent rate for the year. The CPI was up only 3.4% in 2005. Will we get lucky the last few months this year?

Click here to see inflation statistics


rate said...

Your post is very useful, since anyone today should know what inflation rate is, and what interest rates are. These concepts, if handled properly can determine the financial success or failure of a person.

Cyril Morong said...


Thanks for dropping by and commenting. Glad you liked the post


rate said...

I like to see that people are preoccupied with essential things, and not only care about what they wear or eat.