Which formula describes the inflation rate calculation used in the CPI example?

Which formula describes the inflation rate calculation used in the CPI example?

• A. Difference divided by previous year index times 100
• B. Difference divided by current index times 100
• C. Previous index divided by current index times 100
• D. Average of current and previous index divided by 100

Answer: (A)

Calculating the inflation rate from a CPI index is about measuring how much prices have changed from one year to the next. The standard formula is (current CPI − previous CPI) ÷ previous CPI × 100. This uses the previous year’s index as the base, so the result is the percentage change relative to that base. For example, if the CPI this year is 260 and last year it was 250, the difference is 10; 10 ÷ 250 = 0.04, and 0.04 × 100 = 4% inflation. Using the current index in the denominator would distort the rate, reversing the ratio yields the reciprocal of the change, and averaging the two indexes isn’t how inflation is defined for a single period. The correct approach is the percentage change from the previous period using the previous index as the base.

Calculating the inflation rate from a CPI index is about measuring how much prices have changed from one year to the next. The standard formula is (current CPI − previous CPI) ÷ previous CPI × 100. This uses the previous year’s index as the base, so the result is the percentage change relative to that base. For example, if the CPI this year is 260 and last year it was 250, the difference is 10; 10 ÷ 250 = 0.04, and 0.04 × 100 = 4% inflation. Using the current index in the denominator would distort the rate, reversing the ratio yields the reciprocal of the change, and averaging the two indexes isn’t how inflation is defined for a single period. The correct approach is the percentage change from the previous period using the previous index as the base.