Inflation Rate
Variable and average inflation rates
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- 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 + in) (2)
where
in = inflation rate of period n
The average inflation rate for all periods can be calculated as
(1 + ia)n = (1 + i1) (1 + i2) ...... (1 + in) (3)
or
ia = [(1 + i1) (1 + i2) ...... (1 + in)]1/n - 1 (3b)
where
ia = average inflation rate
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Related Topics
- Economics - Engineering economic concepts - cash flow diagrams, discount rate, internal rate of return - IRR, income taxes, inflation
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