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Home > Education and Museum > How the Inflation Calculator Works
 

How the Inflation Calculator Works

Inflation Calculator | How it works | Calculator Caveats

The Inflation Calculator uses a UK price index to show you how the cost of goods and services has changed over time.

It can do this in two ways.  You can ask it to calculate the future cost of goods and services based on price changes from a date in the past. Or, to calculate the past cost of goods and services based on price changes from a date in the future.

The Calculator works for values of goods and services between £1 and £1,000,000,000,000 (£1 trillion).

For example, imagine you want to know what goods and services costing £23.60 in 1975 would have cost in 1985 (the future cost of goods and services).

The price index for 1975 = 134.8
The price index for 1985 = 373.2

The Calculator increases the cost in 1975 by the change in prices between 1975 and 1985 with this formula:

Cost in 1985 = Cost in 1975 x ( 1985 price index / 1975 price index )

£65.33 = £23.60 x ( 373.2 / 134.8 )

So the future cost in 1985 of the same goods and services has risen to £65.33.

Average Inflation

The Inflation Calculator also tells you the average yearly inflation rate between 1975 and 1985.  The formula for this is:

Average inflation = ( ( ( 1985 price index / 1975 price index ) ^ 0.1 ) – 1 ) x 100

The answer is:

10.7% = ( ( ( 373.2 / 134.8 ) ^ 0.1 ) -1 ) x 100

This looks a bit complicated, but it just shows that on average prices rose by 10.7% a year between 1975 and 1985.  By the way, “^ 0.1” means that the change in prices is “raised to the power of one tenth” to calculate the average inflation rate over 10 years.

Deflation

If prices fell between the two years you input to the Calculator, average inflation will be negative.  This is sometimes called “deflation”.

For example, say you input the dates 1920 and 1933.  The Calculator reveals that “inflation” averaged -3.5%, because prices fell in almost every year between 1920 and 1933.

The price index used in the calculations is the “composite price index” published by the Office for National Statistics.