How to Calculate Inflation Adjustment

Inflation is the increase in the cost of goods and services over time. Inflation adjustment calculates the prices of goods and services at different times, adjusted to economic indicators. A good example that illustrates this is the price of a gallon of milk, how that has changed over time and what a future cost of living might be based on an assumed inflation rate.

Things You'll Need

• Calculator

Instructions

How to Calculate Inflation Adjustment

1. Assume the cost of milk is $5 per gallon in Year 1. We will calculate the cost of the same gallon of milk in Year 10. Assume that the inflation rate is 8 percent annually.

2. Using the inflation percentage, covert it to a factoring number according to the following equation: %/100 + 1 = 8/100 + 1 = 1.08.

3. Take the factoring number and raise it to the power equal to the number of years in question as follows: 1.08^10 = 2.16. This is the index number.

4. Take the Year 1 cost of milk and multiply it by the index number to determine the future cost of milk: $5 times 2.16 = $10.80, more than doubling the cost.