7 Min Read | Updated December 15, 2023

Originally Published: June 26, 2020

How to Calculate Inflation Rates

Here’s an overview of the typical inflation rates economists use to better understand the U.S. economy, why they matter, and how to calculate them.

Inflation Rates

This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

At-A-Glance

The inflation rate you usually hear about in the news measures how prices are increasing in the goods that most people buy all the time.

Other inflation rates are used to measure increasing prices for raw materials, for employment—and for the entire U.S. economy.     

While many people understand how inflation impacts their finances, many don’t know how to determine the current inflation rate.


For many Americans, inflation is top of mind. After spending years below 2%, inflation has hit the highest levels seen in decades. As the inflation rate remains high, people’s finances come under pressure.

 

While Americans understand how inflation impacts their finances, many don’t know how to determine the current inflation rate.  This article describes the main inflation rates that economists concentrate on, and how to calculate them.

Understanding the Language of Current Inflation Rates

Regardless of which inflation rate you’re talking about, inflation is the pace at which prices rise. If the inflation rate is 2% a year, then prices are rising on average by 2% every year. But this doesn’t mean that every price in the economy is rising at that rate. Prices of some things might be rising faster than 2%, while prices of other things are rising more slowly or might even be falling. The average of all these price changes is the inflation rate. 

 

If the rate of inflation falls, that doesn’t mean that prices are falling. It just means prices are rising slower. Only if the inflation rate is negative do prices fall. “Disinflation” is the word economists use to describe an inflation rate that is falling but still positive. “Deflation” is used when the inflation rate is negative, and prices are actually falling. 

 

Deflation is most often seen when the economy is in recession, and often takes the form of heavy discounting and fire sales by stores and other companies that are doing their best to stay in business. In the U.S., deflation doesn’t usually last for long.

How to Calculate Different Types of Inflation Rates    

There are lots of different prices in the economy, and therefore lots of different types of inflation rates. There are also different ways of calculating similar types of inflation. 

 

Consumer Price Index (CPI): This is the best-known and most widely used inflation measure. This is the rate at which consumer prices are rising. The CPI is a “basket” of consumer goods and services that represents what Americans typically buy on a monthly basis. Because the Bureau of Labor Statistics (BLS) monitors changes in the prices of these goods and services in mostly urban areas, you may also see CPI referred to as CPI-U. The BLS calculates the index and publishes it monthly.1 

 

It is usually quoted as a percentage rise “per annum.” So, for example, if the CPI inflation rate is 2% per annum, that means that consumer prices are, on average, rising by 2% every year. The CPI inflation rate is used to determine Social Security benefit increases, and is typically the reference rate for inflation-protected investments such as indexed government bonds and inflation swaps, which people can use to protect their savings against inflation. 

 

Personal Consumption Expenditures (PCE): An alternative to the CPI inflation rate is the PCE inflation rate, which is calculated by the Bureau of Economic Analysis (BEA).2 The PCE inflation rate is calculated in a similar way to the CPI inflation rate, but its basket of goods and services is broader. It tends to be slightly lower than the CPI inflation rate. 

 

Both CPI and PCE inflation rates have two versions: the so-called “headline” rate, which is the one you will see in the press, and the “core” rate, which strips out some consumer goods and services whose prices tend to move around a lot, such as gasoline. One part of the Federal Reserve’s dual mandate is price stability. Price stability means that inflation remains low and stable over the long term.3 The U.S. Federal Reserve has targeted an inflation rate of 2% as measured by the Personal Consumption Expenditures (PCE) Price Index.4 

 

Other types of inflation rates that you may see quoted in the news include: 

  • Producer Price Index (PPI): the rate at which prices paid by businesses for raw materials and other supplies are rising.
  • International Price Program (IPP): the rate at which import and export prices are rising.
  • Employment Costs Index (ECI): the rate at which wages and other costs of employment are rising.        

How to Calculate the CPI Inflation Rate

The BLS publishes monthly and annual CPI inflation rates—in other words, the change in prices since last month or last year. But you can use the CPI to calculate the inflation rate between any two dates. For example, let’s imagine it is December 2022 and you want to know what the CPI inflation rate has been for the past two years—since December 2020. Here’s how to make that calculation:  

 

Note that this data was taken from the BLS, looking at the: Historical Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, all items, by month:5

 

  1. First, look up the CPI-U indexes for December 2020 and December 2022. The CPI-U index in December 2020 was 260.474, and for December 2022 was 296.797.
  2. Next, subtract the December 2020 figure from the December 2022 one to give the change in the index: (Dec 2022) 296.797 – (Dec 2020) 260.474 = 36.323.
  3. Then divide that by the December 2020 figure: 36.323 / 260.474 = 0.1394.
  4. And multiply by 100 to obtain the percentage: 0.1394 x 100 = 13.94%.   

 

Note that this is not an annual figure. If you want to know the average annual rate during that time, you need to divide this by the number of years: 13.94% / 2 = 6.97%. 

 

You can use the same calculation method to work out other inflation rates from their indexes.

Understanding the ‘GDP Deflator’ Inflation Rate

If you read a lot of economic news, you may come across the “GDP deflator.” This is an inflation rate calculated in an entirely different way from any of the types we have discussed so far. The GDP deflator calculates the change in prices from one period to the next across the entire economy. The BEA publishes the GDP deflator quarterly.

 

Here’s how the GDP Deflator works: GDP (“gross domestic product”) is the total value of all goods and services sold in a single year, excluding imports, and it can only increase in two ways: either prices rise, or people buy and sell more goods and services than they did last year. “Nominal” GDP growth is calculated based on current-year market prices, and so the effect of inflation is bundled in. 

 

But economists also want to know whether businesses and consumers really are buying and selling more actual stuff. So they calculate “real” GDP, which strips out the effect of inflation, by referencing prices in a baseline year—thus excluding price rises since that year.


The Takeaway

Inflation can seem to change in unpredictable ways, and headline figures may bear little relationship to your experience of price changes in daily life. Knowing how the various inflation rates are calculated may help you to understand the effect of inflation on your finances, and help you plan more effectively for the future.


Frances Coppola

Frances Coppola spent 17 years in the financial services industry before becoming a noted writer and speaker on banking, finance and economics. Her work appears in the Financial Times, Forbes and a range of financial industry and other publications.

 

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

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