Inflation Rate Formula

Inflation Rate Formula

Most people are aware of inflation. However ask them to give you the inflation rate formula and they are at a lost. Fortunately you don’t have to get out your pocket calculator.

The government keeps track of it through their Consumer Price Index (CPI). While this is a helpful tool and can be your rate of inflation formula, your personal economic fortune will probably improve if you use a Personal Price Index (PPI).

With a PPI, you will have your personal inflation rate equation at your fingertips. If you are asking why that is important, look at this astounding figure. It took $2.73 in 2011 to buy $1.00 worth of 1980 goods.

That alone should be incentive enough to develop a PPI. However, another incentive, in my opinion, is this statement by the U.S. Bureau of Labor Statistics: “Prices for the goods and services used to calculate the CPI are collected in 87 urban areas throughout the country and from about 23,000 retail and service establishments.”

87 sounds like a high number of localities but statistically speaking, your area isn’t in their rate of inflation equation. Developing a PPI is easy and is based on the prices you pay for goods you use every day.

For example, most of us buy milk, eggs, butter, bread, meat, toothpaste, shampoo, laundry soap etc. The price you pay is different from the price I pay. Hence, even if my urban area is in the CPI rate of inflation formula, our numbers will be different.

Simply take a piece of paper and list all of the items you buy on a regular basis on the left side of the paper. Skip over an inch and put the price you paid the last time you bought that item. The next time you buy an item put that price next to the last price.

Do that for three months and your sheet of paper will have a good numerical baseline from which to calculate your PPI. If the CPI is at 3% and your PPI is at 5%, you know your true cost of inflation. In other words, you no longer have to use an artificial number as your personal rate of inflation number.

Remember, your personal rate of inflation equation or rate of inflation formula is based on your real time spending and not government numbers that may or may not be relevant to you and your family. Truth is the inflation rate formula has also been a personal measure of personal expenditure. Create your PPI and you’ve created your personal inflation rate formula.

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