How to Calculate Inflation?

Calculating inflation is easier than you think. You only need the Consumer Price Index (CPI) from two different moments. Here you'll learn step by step how it works.

The Basic Formula

The formula for inflation is:

Inflation = ((CPI new - CPI old) / CPI old) × 100%

Where:

  • CPI new = the consumer price index at the recent moment
  • CPI old = the consumer price index at the earlier moment

Example: Annual Inflation

Suppose the CPI in December 2023 is 125 and the CPI in December 2022 was 120. Then the annual inflation is:

  1. Calculate the difference: 125 - 120 = 5
  2. Divide by the old value: 5 / 120 = 0.0417
  3. Multiply by 100: 0.0417 × 100 = 4.17%

The inflation over that year was therefore 4.17%.

Example: Monthly Inflation

For monthly inflation, you use the same formula, but compare two consecutive months:

CPI February = 122, CPI January = 121:

Inflation = ((122 - 121) / 121) × 100 = 0.83%

Note: this is the inflation over one month. To get the annual inflation, you compare with the same month a year earlier.

From Inflation to Price Increase

If you know what inflation is, you can calculate how much more expensive a product becomes:

New price = Old price × (1 + inflation/100)

Example: A product costs $100 and inflation is 5%:

New price = $100 × (1 + 5/100) = $100 × 1.05 = $105

Cumulative Inflation Over Multiple Years

Inflation accumulates. Over multiple years, it works like compound interest:

Total inflation = ((1 + year1/100) × (1 + year2/100) × ... - 1) × 100

Example: Three years with 3%, 4% and 5% inflation respectively:

  1. (1 + 3/100) = 1.03
  2. (1 + 4/100) = 1.04
  3. (1 + 5/100) = 1.05
  4. 1.03 × 1.04 × 1.05 = 1.126
  5. (1.126 - 1) × 100 = 12.6%

The total inflation over three years is 12.6% (not 12!).

Calculate Average Inflation

For the average inflation over a period, you can use the geometric mean:

Average = ((end value / start value)^(1/number of years) - 1) × 100

Example: CPI goes from 100 to 125 in 5 years:

Average inflation = ((125 / 100)^(1/5) - 1) × 100 = (1.25^0.2 - 1) × 100 = 4.6% per year

From Price Increase to Purchasing Power Decline

When prices rise with inflation, your purchasing power declines. To calculate what your purchasing power is worth in earlier prices:

Old value = New value / (1 + inflation/100)

Example: You now have $1,000. At 5% inflation, this is worth as much as:

$1,000 / 1.05 = $952.38 from last year

Use the Calculator

Manual calculation can be cumbersome, especially over longer periods. Use our inflation calculator to quickly and accurately calculate what inflation means for your purchasing power. The calculator uses current CPI figures and does all calculations for you.

Also check the current inflation figures to see what the current inflation is, or compare inflation between different countries.