What is the inflation and inflation rate formula you need to know!

inflation rate formula

Inflation is not entirely related to negative things; the impact caused by the occurrence of increase depends on the level of inflation. There are four levels of inflation in a country, mild inflation (less than 10% per year), moderate inflation (10% – 30% per year), massive inflation (30% – 100% per year), and hyperinflation (more than 100 % per year).

When inflation is at a mild level, it will have a positive effect on several parties or economic actors, including the country’s commercial rate. However, when the inflation rate is at its highest value, it will hurt the country’s economy, resulting in a prolonged economic crisis.

The positive impact of inflation

Here are some economic actors who benefit from inflation :

For debtors

A debtor is a person who has a debt to an institution such as a bank. For a debtor, the occurrence of inflation will be beneficial, because the money that must be returned to the bank is lower in value than when it first borrowed.

In times of inflation, the central bank, which is authorized to regulate interest rates, tends to raise interest rates, if interest in a bank rises, then the value of money will tend to fall. An amount of money that was once expensive and a lot of value when inflation will decrease in value.

For producers (entrepreneurs)

Inflation provides benefits for a producer who must continue to produce an output to be offered to consumers. When there is inflation, prices of goods and services in the market will rise because producers increase the selling price, so the company’s income will be higher than before. Especially if the products produced are the people’s basic needs, they will continue to buy them even if the selling price rises.

Because the prices of goods and services on the market go up, producers will also try to increase the amount of production, even though an increase in the amount of production will create more production costs than before. This does not become a burden on producers, and it will make producers have higher income compared to the increase in production costs because the rise in production costs will be proportional to the number of sales and prices of goods sold.

For the people

Inflation, which in general has a significant negative impact on society, is also the wheel of the country’s economy. It turns out that if faced and managed correctly, inflation can have a positive impact on society. When producers start to increase the amount of production of goods, they will also undoubtedly increase the number of workers, and this can be an opportunity for people who need jobs. The community will get an income and can fix the financial crisis in the family. The creation of some job vacancies for workers will reduce unemployment and reduce poverty.

For the country

If inflation experienced by a country is at a low level, this can be indicated to have a positive impact on the country. Even though it is categorized as low inflation, if it is not properly controlled and managed, the expected positive effect will not be realized.

The positive impact of inflation felt by the State, is closely related to the positive impact of inflation felt by every economic actor, especially the public, when inflation can be handled properly will impact on a better industrial wheel, by minimizing the money supply so that people are more interested in saving and investing and can also increase national income.

The positive impact arising from the occurrence of inflation in a country can be felt and maximized by the presence of policies and the role of government. From low inflation to hyperinflation, a country must make policies to tackle inflation. Because if inflation is not handled effectively, only the negative impact will be received by the State and lead to an economic crisis.

Factors That Cause Inflation

The increase in prices of goods continuously or inflation occurs not without cause. In general, there are several factors causing inflation, including :

  1. Increasing the number of requests or demands on a particular type of goods. When demand rises, but stock or supply is limited, there will definitely be a price surge.
  2. The cost of producing an item or service has increased. This is due to an increase in the price of raw materials and workers’ wages. From there, producers will take action to hoist the selling price of goods or services.
  3. When the amount of money circulating in the community is quite high. When the amount of money in the community doubled, the price of goods would increase equally. This was due to an increase in people’s purchasing power, but the stock of goods remained static.


Inflation Rate Formula

Inflation Rate Formula in a country can be calculated based on the Consumer Price Index (CPI), Cost of Living Index, and the Producer Price Index. The formula to calculate inflation based on the CPI is:

The pit is the price of goods in a certain period, Qit is the weight of products in a certain period, Pio is the price of goods in a necessary period, and Qio is the weight of goods in an essential period.

After getting the CPI value, then the inflation value can be determined by using the formula:

Inflation = (CPI period 1- CPI period 2) / CPI period 2) x 100

By using the Inflation Rate Formula, the value of inflation in a country can be known precisely.

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