Inflation Rate

Variable and average inflation rate

Inflation - when prices increases - decreases the value of money over time. Deflation is the opposite of inflation (negative inflation), when prices decreases over time.

Inflation Rate

The future value of money after periods with a uniform inflation rate can be expressed as

F = P (1 + i)ⁿ  (1)

where

F = future value

P = present value

i = average inflation rate per period

n = number of periods

Example - Inflation and Future Value

The future value of 100 after 10 periods with 4% inflation can be calculated as

F = 100 (1 + 0.04)¹⁰ =

    = 148

Variable Inflation Rate

The future value of money after several periods with variable inflation rates can be calculated as:

F = P (1 + i₁) (1 + i₂) ...... (1 + i_n)  (2)

where

i_n = inflation rate of period n

The average inflation rate for all periods can be calculated as

(1 + i_a)ⁿ = (1 + i₁) (1 + i₂) ...... (1 + i_n)  (3)

or

i_a = [(1 + i₁) (1 + i₂) ...... (1 + i_n)]^1/n - 1 (3b)

where

i_a = average inflation rate

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