Inflation rate is defined as the percentage increase in the price levels of the basket of selected goods and services over a time period.
The rise in inflation rate indicates that there is a decline in the purchasing power of the currency, and as a result, there is an increase in the consumer price index (CPI).
In other words, the inflation rate is said to be the rate at which the prices of goods increase when the purchasing power of currency declines.
One of the most common causes of inflation in an economy is the increase in the money supply.
Inflation rate serves as an indicator of the position of an economy and is keenly observed by the government and central banks to help them make appropriate changes to their monetary policies.
Inflation rate is determined as the rate of change that takes place in the consumer price index over a time period.
The formula for calculating the inflation rate is as follows:
Inflation rate = (Current period CPI − Prior period CPI)/Prior period CPI
This concludes the topic of the inflation rate formula, which plays an important role in identifying the health of an economy. For learning about various other interesting concepts on economics for class 12, stay tuned to our website.