Question

The table below shows the index numbers for the cost of a basket of goods and...

The table below shows the index numbers for the cost of a basket of goods and services in each period. Use this information to calculate the inflation rate for each period. Round to two decimal places.

Index Number Inflation Rate
Period 1 100 -
Period 2 106
Period 3 109
Period 4 113
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Answer #1

The inflation rate can be calculated as follows:

Index Number Inflation Rate (compared to previous year) Inflation Rate (compared to base year) - optional
Period 1 100 -- --
Period 2 106 6% 6%
Period 3 109 2.83% 9%
Period 4 113 3.67% 13%

Note: For Period 1, inflation cannot be calculated as there is no previous year. Period 1 is the base year.

For other periods, inflation can be calculated in two ways:

  • as per previous year - here, difference in price index is taken as per the previous year
  • as per base year - here, difference in price index is taken as per the base year

Generally, inflation is measured compared to the previous year.

The formula used is:

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