Inflation describes the rise of the price of goods and services over a period of time. Inflation rate or rate of inflation measures the increase in price of goods and services using an average percentage, measured over a year.
The calculation of the inflation rate uses the change in the consumer price index (CPI) from one year to the next. The CPI consists of specified goods and services that the average family purchases, it can be anything from groceries to gasoline. The CPI for a given year is expressed in the amount it costs to purchase the good and services it contains in dollars ($).
Assume that for 2019 the CPI is $150 and for 2020 the CPI is $175:
- Inflation Rate = %
Very rapid inflation is called Hyperinflation, specifically, when the rate of inflation is more than 50% per month. At this rate, prices grow 100 times higher than the previous year. Hyperinflation must be measured monthly due to the dramatic rise in prices.
An example of a major hyperinflation event was in Germany after World War II. The situation was so critical that Germans brought wheelbarrows of German Marks to buy a loaf of bread. Similarly in Hungary from August 1945 - August 1946 there was an inflation rate of 19,800% per month.
Just as inflation is the rise in the CPI, deflation is a fall in the CPI over time. Deflation occurs when the rate of inflation falls below zero. Contrary to inflation, in a deflation situation a consumer is able to buy more with less money. After the Great depression of the 1930s, there was a period of deflation where the demand for investment was not being met and economic growth stalled.
For Further Reading
- A. B. Abel, et al. Macroeconomics, 6th ed. Toronto, Canada: Pearson, 2011, pp. 6
- R. A. Brealey et al. Fundamentals of Corporate Finance. Toronto: McGraw-Hill Ryerson, 2009, pp. 108-109.
- N.G. Mankiw et al. Principles of Macroeconomics 5th ed.. Toronto: Nelson Education, 2011, 250.
- A. B. Abel, et al. Macroeconomics, 6th ed. pp. 514.
- N.G. Mankiw et al. Principles of Macroeconomics 5th ed. pp. 241.
- M. S. Kumar et al. Deflation: Determinants, Risks, and Policy Options- Findings of an Interdepartmental Task Force. [Online], Available: http://www.imf.org/external/pubs/ft/def/2003/eng/043003.htm [Apr 30, 2003].