Generally, the effect of inflation is that the price of goods increases over time. For example, a basket of goods in 1960 is cheaper than the same basket of goods available today. Inflation occurs for multiple reasons depending on the circumstances in a country's economy. While economists have trouble defining reasons for inflation, most economist agree inflation is based on the economic principles of supply and demand. When calculating inflation, use the Consumer Price Index (CPI) to compare years. The CPI takes an average a household spends on a similar basket of goods each month. More specifically, the Bureau of Labor Statistics (BLS) defines the CPI as "prices paid by urban consumers for a representative basket of goods and services."
Things You'll Need
- Consumer Price Index
Determine the CPI for the two years you are calculating the inflation. You can find the CPI on the BLS website (see Resources). Typically, when calculating the rate of inflation, economists will use the All Urban Consumer database. Select the Multi-Screened search, then select the following data clicking "Next Form" after each selection: "Not Seasonally Adjusted," then "0000 U.S. City Average," then "Current," then "All Items," then "Monthly." Finally select "Retrieve Data" to find the U.S. City Average CPI on a Monthly Basis. From this chart, select the times you want to compare. For example, if you want to calculate inflation between January 2005 and January 2010, the rates are 190.7 for January 2005 and 216.687 for January 2010.
Subtract the most current CPI from the oldest CPI. In the example, 216.687 minus 190.7 equals 25.987.
Divide the number calculated in Step 2 by the oldest CPI to calculate inflation. In the example, 25.987 divided by 190.7 equals about 0.1363 or 13.63 percent.
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