Inflation Calculator

What is an Inflation Calculator?

Inflation is the increase in the prices of goods and services over time, resulting in a decline in the purchasing power of money. It's expressed as a percentage rise in price over a specified period.

An inflation calculator is a tool used to estimate the impact of inflation on the increase in the price of goods and services over time. In the inflation calculator, you input the current amount for a particular product (e.g. 1000 rupees) along with the inflation percentage (e.g., 4.56%) and the duration (e.g. five years). Then, the calculator will provide you with the future value or the inflated value of the product (that is 1250 rupees).

Inflation:

What is Inflation?

Inflation is the rate of increase in prices over a given period of time or the decrease in money's spending power over time.

Factors that cause Inflation?

Major factors that cause inflation are:

• Increase in Demand: Prices tend to rise when demand for goods and services exceeds supply.
• Cost-push Inflation: Occurs when the cost of production increases, resulting in an increase in the price of the final goods and services.
• Supply Shortages: Prices will increase if the supply of certain goods or services decreases, which results in scarcity situations.
• Increase in money supply: When the money supply increases, spending power increases, and thus, the prices of goods and services increase.
• Government Policies: Government policies can also lead to inflation.

Types of Inflation?

• Creeping Inflation- when the prices of goods and services rise less than 3% per year.
• Walking Inflation- when the prices of goods and services rise from 3% to 4% per year.
• Running Inflation- is when the prices of goods and services rise more than 9% per year.
• Galloping Inflation- is when the prices of goods and services rise more than 10% per year.
• Hyperinflation- is when the prices of goods and services rise more than 100% per year.

How is Inflation measured?

Inflation is measured using various methods, some of which are:

• Consumer Price Index (CPI): This index tracks the change in the prices consumers pay for consumer goods and services over time.
• Producer Price Index (PPI): This index tracks the average change in producers' selling prices for their goods and services. It also gives an early indication of inflation.
• Employment Cost Index (ECI): This index tracks the increase in labour costs over time. Increases in labour costs can lead to inflation.
• GDP Deflator: This index tracks the prices of all new, domestically produced, final goods and services in an economy in contrast to the final prices of the same goods and services in previous years.
• Cost of Living Index: This index tracks the cost of living in different areas of the world and gives an idea of inflation.

How Inflation is Calculated?

Here is How the Inflation calculator works-

Input Values: You have to provide the following details, like:

• Rate of Inflation (p.a.)- The inflation rate per year
• Current cost (in Rs)- The current cost of the product
• Period (in years)- The duration for the inflation to act on

Output:

• Future Value- the inflated price of the same product after a particular period due to inflation.

The pie chart shows the increase in the amount from the current cost.

Formula to calculate the Inflation-

Increase due to inflation = (P x R x T) / 100

Future Value = current amount + increase due to the inflation

Where:

• P = Principal amount /current amount
• R = Inflation Interest Rate
• T = Period/Time duration (in years)

Advantages of Using an Inflation Calculator

The inflation calculator offers several advantages:-

• It helps you compare the purchasing power of money between different periods.
• Helping with choosing investments and assets that can at least beat inflation.
• It helps us understand the real/actual value of money.
• The tool is easy to use, and you can easily calculate the increase in a product's cost due to inflation.

Steps to use the Inflation Calculator?

Using the inflation calculator is a straightforward process. Here's a breakdown of the typical steps involved:

1. Input Rate of Inflation (p.a.): Enter the inflation interest rate of your country
2. Input Current cost (in Rs): Enter the current cost of the product
3. Input Period (in years): Enter the time duration
4. Step 4: Click on the Calculate button.

Output: The calculator will display the following results:

• Future Value: This shows the future inflated price of the current amount entered
• The pie chart shows the increase in the amount from the current cost.

Common Mistakes to Avoid While Using the Inflation Calculator?

To ensure the accuracy of your calculations, avoid these common pitfalls:-

• Inaccurate Values: Double-check the inflation interest rate before calculation to get the correct estimation of Future Value

Inflation % of India

Inflation Rate (All India): 4.85% ( as of May 2024)