Inflation is the general increase in the prices of goods and services over time. It reduces the purchasing power of money and affects both consumers and businesses. Inflation is measured by the percentage change in the consumer price index (CPI), which is a basket of various goods and services consumed by households. Inflation can have positive effects when it is low and stable, such as stimulating spending and economic growth. However, when inflation is high and volatile, it can have negative effects, such as eroding savings and creating uncertainty.
The basic theory of inflation is that it is caused by an imbalance between the supply and demand of money in the economy. When the supply of money grows faster than the demand for money, the value of money falls and the prices of goods and services rise. Conversely, when the demand for money grows faster than the supply of money, the value of money rises and the prices of goods and services fall. The supply and demand of money are influenced by various factors, such as monetary policy, fiscal policy, exchange rates, productivity, expectations, and shocks.
Historical Trends
The historical trends of inflation vary across countries and time periods. According to the World Bank, the world inflation rate was 8.27% in 2022, which was the highest level since 1994. The main drivers of the global inflation surge were the soaring energy costs, labor mismatches, and supply disruptions caused by the COVID-19 pandemic. The inflation rates of different regions and countries also differed significantly, depending on their economic conditions and policy responses. For example, the inflation rate of the European Union was 8.83% in 2022, while the inflation rate of East Asia and Pacific was 5.41% in 2022.
Excel Formula
One way to calculate the inflation rate in Excel is to use the following formula:
= (CPI x+1 - CPI x) / CPI x
Where,
- CPI x+1 is the CPI of the current year
- CPI x is the CPI of the previous year
For example, if the CPI of 2022 was 158 and the CPI of 2021 was 150, the inflation rate of 2022 would be:
= (158 - 150) / 150 = 0.0533 = 5.33%
Another way to calculate the inflation rate in Excel is to use the RATE function, which returns the interest rate per period of an annuity. The syntax of the RATE function is:
= RATE(nper, pmt, pv, [fv], [type], [guess])
Where,
- nper is the total number of payment periods
- pmt is the payment made each period
- pv is the present value
- fv is the future value
- type is the timing of the payment (0 for end of period, 1 for beginning of period)
- guess is an initial estimate of the rate
To use the RATE function to calculate the inflation rate, we can set the nper to 1, the pmt to 0, the pv to the negative CPI of the previous year, and the fv to the CPI of the current year. For example, using the same CPI values as before, the inflation rate of 2022 would be:
= RATE(1, 0, -150, 158) = 0.0533 = 5.33%
Scenario and Example
To illustrate how to use the Excel formula to calculate the inflation rate, let us consider a scenario where we have the CPI data of Indonesia from 2019 to 2022, as shown in the table below:
| Year | CPI |
|---|---|
| 2019 | 104.7 |
| 2020 | 105.7 |
| 2021 | 107.4 |
| 2022 | 110.1 |
We can use the Excel formula to calculate the inflation rate for each year, as shown in the table below:
| Year | CPI | Inflation Rate |
|---|---|---|
| 2019 | 104.7 | N/A |
| 2020 | 105.7 | 0.96% |
| 2021 | 107.4 | 1.61% |
| 2022 | 110.1 | 2.51% |
The inflation rate for 2020 is calculated as:
= (105.7 - 104.7) / 104.7 = 0.0096 = 0.96%
The inflation rate for 2021 is calculated as:
= (107.4 - 105.7) / 105.7 = 0.0161 = 1.61%
The inflation rate for 2022 is calculated as:
= (110.1 - 107.4) / 107.4 = 0.0251 = 2.51%
Other Approaches
There are other approaches to calculate the inflation rate, such as using the GDP deflator, the producer price index, or the personal consumption expenditures index. These indices measure the changes in the prices of different baskets of goods and services, which may reflect different aspects of the economy. However, the CPI is the most commonly used and widely available index for measuring inflation. Therefore, the Excel formula based on the CPI is a simple and convenient way to calculate the inflation rate.
