Consider the following data: Year 1: CPI is 100 Year 2: CPI is 104 Year 3: CPI is 107 What is the inflation rate in Years 2 and 3?

Answer:

Generally the rate of inflation is generally expressed as rate of increase in prices on year on year (YOY ) basis.

In the light of same the

Rate of Inflation in year 2 could be expressed as = (CPI in year 2 – CPI in year 1) divided by CPI for year 1 and taking percentage rise:

= (104 - 100)/100 x percentage = 4%.

Likewise Rate of Inflation in year 3 = (CPI in year 3 – CPI) in year 2 divided by CPI in year 2 and taking percentage rise

= (107 -104 )/104 x percentage = 2.88%

So the answers are 4% and 2.88%