- Personal Finance
How to find Inflation Rate
If you refer to dictionaries, you can find, Inflation Rate is the rate of change of prices (as indicated by a price index) calculated on a monthly or yearly basis. Many of us would know this but with million questions. And we always had a question like which is good low or high rate of inflation. I am just trying to explain inflation and other related words in simple terms.
How to Calculate
Well we can say this as rate of change in price over last year. For example, we can take rate of petrol.
During 2006 it is $2.46 per gallon.
During 2007 it is $3.09 per gallon.
We can derive inflation rate for petrol price as below,
(Price During 2007 - Price During 2006)
----------------------------------------------- X 100
Price During 2007
If you calculate this inflation rate is 20.38%
Zimbabwe A Victim of High Inflation
Do you think "Inflation means Inflation Rate" - then you are in dilemma?
Many people think both the terms - inflation and inflation rate as equivalent. In actual, both are different. Inflation rate shows the rate of change in prices where as the Inflation is general and progressive increase in inflation rate in other words prices of goods.
Deflation is describes declining price rates (going down compared to last year). Economists say this as an economic activity resulting in a decline of prices. We can say this is as a term which is just opposite to inflation.
Deflation vs Disinflation - one more dilemma
Again, many people would think Disinflation is another name for Deflation. But that conception is exactly wrong.
Inflation, Deflation and Disinflation
A Graphical Illustration
Refer the picture which would illustrate you more clearly what the above terms.
Before 2001 (year is not shown - which is actually around 1950), it was negative (below 0%) and hence we call it as deflation. And when it comes to a positive hike, we call it as inflation during 2001 and a decreasing trend of prices during 2002 is marked as disinflation.
Which is Good?
In general, when there is low inflation/disinflation, all the goods become more valuable except money. So with lower prices (Disinflation), it's obvious that good for consumers, provided there is considerable raise in salaries while low raise in costs of goods. Disflation is good for creditors because they were paid back with more value for the same money. Say you are paying $200, per month and when there is a deflation that $200 matters more than what it is earlier.
But you would have heard some economists saying, "Low inflations are uncertain". But if you see the history, when there is high inflation they do keep saying "High Inflations are uncertain". But if you see the time they commend, there may be more fluctuating rate of inflation. Yes, the truth is that if inflation remains steady, then there will not be any uncertainty. As long as your money is valued more, you will benefit more.
How does this affects me?
Many people think these are all economic constructs of a nation and for people this does not matter any thing. And so many people just ignore this.
But this really affects every people. Let me explain with an scenario. I am planning for a retirement in 2020. And i plan to make a financial backup of 0.5 million dollar for my retirement life. Ok what could happen if the food amd other prices increase by 30%? Yes! Certainly i am in 30% shortage of funds and hence 30% of my retirement life leave behind question.
Hope you all understand inflation rate and its impacts better.