# Inflation Rate

## Inflation and future value

- 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 (positivefor inflation,negativefor 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 - i_{1}) (1 - i_{2})^{ }......^{ }(1 - i_{n})^{ }(2)

where

i_{1..n}= inflation rates of terms

The average inflation rate for all periods can be calculated as

(1 - i_{a})^{n}= (1 - i_{1}) (1 - i_{2})^{ }......^{ }(1 - i_{n})^{ }(3)

or

i_{a}= 1 - [(1 - i_{1}) (1 - i_{2})^{ }......^{ }(1 - i_{n})]^{1/n}(3b)

where

i_{a}= average inflation rate

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