Inflation Rate Formula and Its Economic Effects

Inflation Rate Formula and Its Economic Effects

An often used but little understood term in financial circles, inflation has been misinterpreted as a result or an effect of higher prices, but this is not the case.

The inflation rate formula is quite simple

You can fill these variables in by simply finding the CPI(Consumer Price Index) of the year you want to start with, and the CPI of the year you want to end with. Example, if you want to find the inflation rate from 1996 to 2000, simply go to the link we provided above, with the CPI of 1996 being the variable last year, and 2000 being this year. Then multiply your answer by 100 to get your percentage.

Inflation is a condition in a particular country’s economy where the amount of available currency outstretches the GDP figure for that country. This that is known as inflation, and higher prices are a result of this situation. Now that we have finished talking about the inflation rate formula, we can begin to talk about how inflation effects the economy as a whole.

This affects the Canadian investor by causing consumer pricing to rise

Thus leaving the investor with less money to invest with after buying groceries and filling their gas tank. This inability to invest also affects the stock market, leaving companies with less avenues of capital acquisition. For example, if the CPI levels rise considerably, markets such as the TSX can experience a lull in trading causing its index to drop. This could indicate that an economy is either stagnant or heading towards recession. Of course, this isn’t in the best interest of any country and if left unchecked, would lead to a wildly fluctuating market with tremendous risk such as the markets just before Black Tuesday, October 29, 1929. We have learned our lessons since and safeguards have been put in place to ensure that the market won’t bottom out like that again.

The Bank of Canada has a hand in setting inflation rates to accommodate the disparity of goods versus monetary availability. By monitoring the core CPI, the Bank of Canada arrives at the comfortable inflation numbers that will keep the economy on track and within good financial reason. If you are wondering, core CPI is a specific group of consumer goods not considered to be volatile. The term ‘volatile’ in this context is meant to refer to price fluctuation, not combustion. These volatile products would include such things as fuel, vegetables, fruit, tobacco products and mortgage interest.

In the 1980s, according to Statscan, the inflation rate was at 10%

This may seem minuscule, but a rate such as this can cause general consumer pricing to double in less than ten years. Luckily for Canadians, our inflation rate has dropped to less than 5%. With current mandates from the Bank of Canada to put the inflation rate at 3%, consumer pricing would take approximately 24 years to double. This presents a much more tantalizing prospect for the Canadian investor with long-term goals.

According to investing experts, inflation is not a bad thing. The Canadian investor has to be aware of certain factors in their investment, suppose McCain Foods has an offering of 100,000 shares with a rate of 4%. If the Canadian economy had an inflation rate of 3%, this would leave the prospective investor with a positive growth percentage of 1%. Not a bad investment. However, if the Canadian economy had an inflation rate of 5%, the prospective investor has started their investment in the red, not necessarily a good investment idea. But even in this situation, investment isn’t really out of the question. If you can ascertain that the economy is headed for a sustained surge down the road and you are thinking about long-term investment, it might be prudent to buy-in as your investment in the long run may achieve a positive growth outstripping the rate of inflation. This is dependent on when the economy will perform, for how long and how well versus the time length of your investment. Knowing about inflation is an important step to losing needless and ill-informed investment fear.

Here is an inflation calculator supplied by the Bank Of Canada, you can use this instead of using the inflation rate formula and manually calculating, although it is important to know HOW the rate of inflation is calculated and what influences it. View the calculator here.