Question

If the Consumer Price Index (CPI) was 235 at year-end 2014 and at 230 at year-end 2012, then inflation during 2014 was

A) 0 because prices were stable in 2014.
B) 2.2%.
C) 5%.
D) 30%.

Answer 1

Inflation is a key concept in the study of Economic Science, because it is the way to understand the devaluation or the valuation of money. Inflation occurs when we compare price differences of the same product in two different periods, and can be calculated by price or by some index, such as the Consumer Price Index.

The calculation should be done as follows: we take a base year, in our example is the year 2012. If there was a change in the index between the other year, 2014, there was inflation.

This case can be solved with a simple rule of three:

2012 (base) => 230 = 100%

2014 => 235 = x

Answer = 2.17% which is approximately 2.2%, answer (B)

Note: If you have the prices you just need to use a formula:

[(Current price - base year price) / Current price] x 100

hypothetical example:

Base price in 2012 = $5

Current price in 2014 = $5,50

Using the formula: [(5,50 - 5)/5,5] x 100 = 9%