• Smart Cash
• Performance
• Get Started

What is an annualized inflation rate?

How to calculate the average annual inflation rate over a period of years

Does the consumer price index measure inflation?

The bottom line

LearnInflationHow to Calculate Annualized Inflation Rate

# How to Calculate Annualized Inflation Rate

Feb 1, 2024

·

Determining the annual rate of inflation is a matter of finding the difference between the current number for an index such as the CPI versus its value one year earlier.

Inflation rate shows the pace at which prices of goods and services rise over time. An appropriate amount of inflation can help an economy expand, but too much can have a slew of negative effects: eroding spending power, making exports more expensive, disrupting business planning, and hurting growth. This is among the reasons the Federal Reserve, which controls the U.S. money supply, targets 2% annual inflation, a rate that is seen as neither too fast nor too slow.

The most-watched measure of inflation, the consumer price index (CPI), tracks the prices of a basket of about 80,000 goods and services for consumers in the biggest metropolitan areas, covering most of the U.S.’s population. This metric, which was created and maintained by the Bureau of Labor Statistics (BLS), typically includes a monthly inflation rate and a rolling 12-month rate. The CPI is just one measure that economists and the Fed use to track inflation.

Consumers can look at the CPI a number of different ways to gauge inflation as they manage their investments, personal finances, and plan for retirement. One common way is to convert short-term data into an annual rate, to anticipate how inflation could affect them if it were to remain unchanged for a year. It can also be useful to calculate multiple years of inflation rates to gain a long-term term perspective. Businesses also track inflation gauges as they plan for spending, hiring, and expanding. This is where annualized rates can come in.

## What is an annualized inflation rate?

The inflation rate, or the rate at which prices rise over time, is typically expressed as a percentage over a period of time. One can calculate the inflation rate of a 30-day period or a 30-year period. When the rate is annualized, it typically indicates what the inflation rate for some shorter period—usually a month—would be if it persisted at the same rate for a year.

Here’s an example of the most basic inflation calculation. If a CPI index reading in June is 100 and then rose to 105 in July of the same year, the formula for the rate of change over that one-month period would be:

(final price – initial price/initial price) x 100 = inflation rate

or

(105 – 100/100) x 100 = 5%

However, if you wanted to annualize this number, simply adding 5% to each month, you’d end up with 60%—which isn’t correct. To obtain the correct annualized number, you must use a formula that considers the growth in the base each month:

1. The calculation for the July number is unchanged: (105-100/100) x 100 = 5%.
2. But for each month, you’d calculate the increase based on the larger new base number. For August this figure would be  (105 x 0.05) + 105 = 110.25.

3.  Assuming inflation remains 5%, the base number for September then becomes 110.25. Following this annualizing pattern, (110.25 x .05) + 110.25 = 115.76, and so on.

After one year of 5% monthly inflation increases, the total amount of inflation would be 79.59%.

## How to calculate the average annual inflation rate over a period of years

The average annual inflation rate is the yearly pace of change in an index over a period. Just as it wouldn’t be accurate to derive an annualized rate by multiplying by 12, it wouldn’t be accurate to try and calculate the annual inflation rate over multiple years by dividing the total inflation rate by that number of years. To reach the average annual inflation rate over a span of years, you need a formula that accounts for compounding. To do this, economists use a base and target year in the equation.

Let’s use the inflation rate formula to come up with the total inflation of a pound of bacon that cost \$3 in September 2018 and \$7 in September 2022. To do this you would:

1.  Subtract the base year from the target year: \$7 - \$3 = \$4

2.  Divide the difference by the base year: \$4/\$3 = 1.33

3.  Multiply this sum by 100 to reach a percentage: 1.33 x 100 = 133%

So the total inflation for a pound of bacon in the four-year period was 133%.

If you wanted to know the annual inflation rate for this pound of bacon over the same period, where a pound of bacon is worth \$3 in September 2018 and \$7 in September 2022, you would use the average annual inflation rate formula:

(((Target year / base year)^(1/years in time frame)) – 1) x 100

1.  Divide the target year by the base year: 7/3 = 2.3

2.  Divide 1 by the number of years the inflation took place: 1/4 = .25

3.  Raise the result of step one to the power of the answer in step two: 2.3^(.25) = 1.23

4.  Subtract 1 to see the answer as a decimal: 1.23 – 1 = .23

1. Multiply the answer by 100 to convert the answer to a percentage, in this case 23%.

The average annual inflation rate in those four years was 23%.

## Does the consumer price index measure inflation?

Because it is so widely reported, the CPI alone is often used as a proxy for inflation. However, it is just one metric. The CPI is based on prices of food, clothing, shelter, energy, transportation, and medical services, as well as other goods and services that most people buy. It does not represent all consumption in the economy, and some economists argue that biases built into CPI lead to an overstatement or understatement of inflation.

## Consumer price index (CPI)

This index is a metric the Bureau of Labor Statistics has devised to measure the change in the prices of about 80,000 goods and services for all urban consumers. The figure is calculated as a weighted average—meaning more expensive items have more influence—that represents an aggregate of U.S. consumer spending. This is the most widely watched inflation gauge, and BLS releasesmonthly numbers, which show the price change for the most recent month, seasonally adjusted, and for the past 12 months.

## Personal consumption expenditures price index (PCE)

This index, published by theBureau of Economic Analysis, tracks a different set of goods and services than CPI. Rather than a fixed basket of goods and services, it analyzes the prices of goods people are actually buying each month. This is the preferred metric of the Fed to measure inflation. It also includes some expenditures that CPI excludes, such as healthcare that is not paid for directly, such as Medicare, Medicaid, and insurance paid for by employers.

## Producer price index (PPI)

This index,reported by BLS, tracks wholesale prices of physical goods and adds services to the basket. PPI eliminates some taxes in the prices it tracks. Since the prices for sellers and retail buyers may differ significantly due to sales and excise taxes, distribution, and other added costs, PPI can offer further insight into the state of the wholesale industry. This measure was broadened in 1978 from the wholesale price index (WPI), which tracked only the wholesale prices of goods before they are sold at retail.

## The bottom line

Determining the annual rate of inflation is a matter of finding the difference between the current number for an index such as the CPI or the price of a single item, versus its value one year earlier. Other calculations can be used to find the annual inflation rate over a span of years or to extrapolate an annual inflation rate from data for a shorter period, such as one or two months.

The results of these calculations can help investors understand the performance of their investments and personal finances, while also giving companies information that can be useful in developing their business plans.

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

Get started today.

Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

Three Things, a newsletter from Titan

Stay informed on the most impactful business and financial news with analysis from our team.

You might also like

15 Positive and Negative Effects of Inflation

Inflation can be beneficial for the economy but it can affect the value of savings, income investment returns, and can lead to decrease the competition for a country.

How Inflation Affects Bonds

Bond pricing has an inverse relationship with interest rates. When interest rates rise, bond prices usually fall. If inflation is rising, the return on a bond declines.

The Highest Inflation Rate Ever

Inflation is part of the ebb and flow of the business cycle. The highest inflation in the U.S. often has been tied to wars in this country or crises in other countries.

How to Invest \$25,000: 5 Ways

Investors looking to make their \$25,000 grow can explore several opportunities, like CD ladders, stocks, actively managed funds, real estate, and art.

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.