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Computing the Rate of Inflation
The consumer price index can be used to compute the rate of inflation. The rate of inflation is the
percentage annual increase in the index. The percentage annual increase in the index is
calculated by dividing the annual change in the index (current year CPI minus previous year CPI)
by the previous year’s index. The following examples illustrate:
Example 3A: The CPI for 1945 was 18.0 and the CPI for 1946 was 19.5. What was the rate of
inflation for 1946?
Inflation Rate (1946) = (CPI for 1946 – CPI for 1945) ÷ CPI for 1945 = (19.5 – 18.0) ÷ 18.0
= 1.5 ÷ 18.0 = .083 or 8.3%
Example 3B: The CPI for 1964 was 31.0 and the CPI for 1965 was 31.5. What was the rate of
inflation for 1965?
Inflation Rate (1965) = (CPI for 1965 – CPI for 1964) ÷ CPI for 1964 = (31.5 – 31.0) ÷ 31.0
= 0.5 ÷ 31.0 = .016 or 1.6%
Example 3C: The CPI for 1989 was 124.0 and the CPI for 1990 was 130.7. What was the rate of
inflation for 1990?
Inflation Rate (1990) = (CPI for 1990 – CPI for 1989) ÷ CPI for 1989 = (130.7 – 124.0) ÷
124.0 = 6.7 ÷ 124.0 = .054 or 5.4%
Example 3D: The CPI for 2012 was 229.6 and the CPI for 2013 was 233.0. What was the rate of
inflation for 2013?
Inflation Rate (2013) = (CPI for 2013 – CPI for 2012) ÷ CPI for 2012 = (233.0 – 229.6) ÷
229.6 = 3.4 ÷ 229.6 = .015 or 1.5%
Adjusting Nominal Values to Real Values
One of the functions of money is to serve as a measure of value (see Chapter 10). The basic
economic measurement unit in the U.S. is the dollar. But the value of the dollar in terms of buying
power changes from year to year because of changes in the price level. During periods of
inflation, the value of the dollar (amount that the dollar will buy) decreases over time. Thus, if
nominal (unadjusted) dollar amounts from different years are compared to each other, the
comparison is misleading.
If dollar amounts from different years are to be fairly compared, the nominal dollar amounts must
be adjusted to real (inflation-adjusted) dollar amounts. The consumer price index can be used to
adjust nominal values to real values. To adjust a nominal value to a real value, the nominal value
is divided by the nominal price index (the price index of the year of the nominal value) divided by
the price index adjusted to. If the nominal value (the value we are attempting to adjust) is from,
say, 2012, the nominal price index is the 2012 price index. If the year we are adjusting to is, say,
1982, then the price index adjusted to is the 1982 price index.
Real value = Nominal Value ÷ (Nominal Price Index ÷ Price Index Adjusted to)
Example 4A: In 1982, the average Oklahoma teacher salary was $16,781. The average
Oklahoma teacher salary was $44,391 in 2012. What was real average Oklahoma teacher salary
in 2012, adjusted to the 1982 price level?
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Real salary (2012) = Nominal salary for 2012 ÷ (CPI for 2012 ÷ CPI for 1982) = $44,391 ÷
(229.6 ÷ 96.5) = $44,391 ÷ 2.3793 = $18,657
4 - 3 Inflation and Unemployment