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Inflation Rate

Inflation and future value

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  • An inflation with rising prices will decrease the value of money over time
  • A deflation - the opposite of inflation or negative inflation - with decreasing prices will increase the value of money 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 (or deflation) rate per period (positive for inflation, negative for deflation)

n = number of periods

Example - Inflation and Future Value

The future value of an amount of 100 after 10 periods and 4% of inflation rate can be calculated as

F = 100 (1 - 0.04)10 =

    = 66.5

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

i1..n = inflation rates of terms

The average inflation rate for all periods can be calculated as

(1 - ia)n = (1 - i1) (1 - i2) ...... (1 - in)                (3)

or

ia = 1 - [(1 - i1) (1 - i2) ...... (1 - in)]1/n                    (3b)

where

ia = average inflation rate

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