How is inflation calculated?


When they say inflation is 7%, is that just compared to items one year ago?

Now that we’re in a new year, shouldn’t there be a sudden reset in inflation being 2-3% again?

In: 1

It’s always looking at same month, one year ago. So year over year change is all that matters, not that a new year has begun.

When they say inflation is 7%, it means that the general price level of goods and services in the economy has increased by 7% on average compared to the previous year. This is usually measured using a basket of goods and services that represents what a typical consumer might buy, and the price changes of these items are tracked over time.

Inflation is not necessarily reset to 2-3% at the beginning of a new year. Inflation is a persistent and ongoing phenomenon that can be affected by a wide range of economic factors, such as changes in government policies, shifts in consumer demand, fluctuations in global commodity prices, and more. While inflation rates can fluctuate from year to year, there is no inherent reason why inflation should be “reset” to a specific level at the start of each year.

If you see the inflation numbers for March 2023, for example, it’s in comparison to March 2022.

It depends on the country and the calculating agency, but it is usually measured monthly or quarterly.

It is measured by comparing the price changes on a basket of underlying goods to the previous period e.g. this month to last month, or whatever period. The basket of goods is supposed to be representative of the spending habits of the average consumer (or similar).

What is in the basket varies by country/agency and can change over time. For example, below is the basket of goods and calculation method used by the Australian Bureau of Statistics as at 2020:

The Consumer Price Index (CPI) measures quarterly changes in the price of a ‘basket’ of goods and services which account for a high proportion of expenditure by the CPI population group (i.e. metropolitan households). This ‘basket’ covers a wide range of goods and services, arranged in the following eleven groups:

Food and non-alcoholic beverages
Alcohol and tobacco
Clothing and footwear
Furnishings, household equipment and services
Recreation and culture
Insurance and financial services.

Inflation is generally the percentage change in CPI over a year.

CPI is the consumer price index. Basically, many households that represent the general population are surveyed on all of the products they buy in a year. These items are the put in to a “basket”

The value of this basket is recorded and the prices are then recorded each year. A chosen year is designated as the “base year” for calculations. To calculate CPI, you divide the current price of the basket by the base year price then multiply by 100.

So if the basket was $1000 in 2020 (base year), then $1200 in 2021

$1200/$1000 * 100 = 120

If its $1350 in 2021:

$1350/$1000 * 100 = 135

now to calculate inflation, you would calculate the percentage difference between 2 years. The inflation between 2021 and 2022 in this example would be:

( (CPI 2022) – (CPI 2021) ) / (CPI 2021) * 100


( (135 – 120) / 120 ) * 100 = 12.5% Inflation between 2021-2022