Inflation Rate

Variable and average inflation rates

• Inflation - with rising prices - decreases the value of money over time
• Deflation - the opposite of inflation (negative inflation) - decreases prices over time

Inflation Rate

The future value of money after periods with uniform inflation rates 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 and 4% inflation rate can be calculated as

F = 100 (1 + 0.04)¹⁰ =

    = 148

Variable Inflation Rate

The future value of money after 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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