Inflation Calculator

Inflation Calculator with U.S. CPI Data

Calculates the equivalent value of the U.S. dollar in any year from 1914 to 2020. Calculations are based on the average annual CPI data in the U.S. from 1914 to 2019.

in 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 1939 1938 1937 1936 1935 1934 1933 1932 1931 1930 1929 1928 1927 1926 1925 1924 1923 1922 1921 1920 1919 1918 1917 1916 1915 1914 = $1.19169 in 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 1939 1938 1937 1936 1935 1934 1933 1932 1931 1930 1929 1928 1927 1926 1925 1924 1923 1922 1921 1920 1919 1918 1917 1916 1915 1914

Forward Flat Rate Inflation Calculator

Calculates an inflation based on a certain average inflation rate after some years.

with inflation rate after years = $1.34392

Backward Flat Rate Inflation Calculator

Calculates the equivalent purchasing power of an amount some years ago based on a certain average inflation rate.

with inflation rate = $0.74409 years ago

Historical Inflation Rate (CPI) for U.S.

In the United States, the Bureau of Labor Statistics publishes the Consumer Price Index (CPI) every month, which can be translated into inflation rate. The following is the listing of the historical inflation rate for the United States (U.S. dollar) since it is available.

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual 2019 1.55% 1.52% 1.86% 2.00% 1.79% 1.65% 1.81% 1.75% 1.71% 1.76% 2.05% 2.29% 1.81% 2018 2.07% 2.21% 2.36% 2.46% 2.80% 2.87% 2.95% 2.70% 2.28% 2.52% 2.18% 1.91% 2.44% 2017 2.50% 2.74% 2.38% 2.20% 1.87% 1.63% 1.73% 1.94% 2.23% 2.04% 2.20% 2.11% 2.13% 2016 1.37% 1.02% 0.85% 1.13% 1.02% 1.01% 0.84% 1.06% 1.46% 1.64% 1.69% 2.07% 1.26% 2015 -0.09% -0.03% -0.07% -0.20% -0.04% 0.12% 0.17% 0.20% -0.04% 0.17% 0.50% 0.73% 0.12% 2014 1.58% 1.13% 1.51% 1.95% 2.13% 2.07% 1.99% 1.70% 1.66% 1.66% 1.32% 0.76% 1.62% 2013 1.59% 1.98% 1.47% 1.06% 1.36% 1.75% 1.96% 1.52% 1.18% 0.96% 1.24% 1.50% 1.47% 2012 2.93% 2.87% 2.65% 2.30% 1.70% 1.66% 1.41% 1.69% 1.99% 2.16% 1.76% 1.74% 2.07% 2011 1.63% 2.11% 2.68% 3.16% 3.57% 3.56% 3.63% 3.77% 3.87% 3.53% 3.39% 2.96% 3.16% 2010 2.63% 2.14% 2.31% 2.24% 2.02% 1.05% 1.24% 1.15% 1.14% 1.17% 1.14% 1.50% 1.64% 2009 0.03% 0.24% -0.38% -0.74% -1.28% -1.43% -2.10% -1.48% -1.29% -0.18% 1.84% 2.72% -0.34% 2008 4.28% 4.03% 3.98% 3.94% 4.18% 5.02% 5.60% 5.37% 4.94% 3.66% 1.07% 0.09% 3.85% 2007 2.08% 2.42% 2.78% 2.57% 2.69% 2.69% 2.36% 1.97% 2.76% 3.54% 4.31% 4.08% 2.85% 2006 3.99% 3.60% 3.36% 3.55% 4.17% 4.32% 4.15% 3.82% 2.06% 1.31% 1.97% 2.54% 3.24% 2005 2.97% 3.01% 3.15% 3.51% 2.80% 2.53% 3.17% 3.64% 4.69% 4.35% 3.46% 3.42% 3.39% 2004 1.93% 1.69% 1.74% 2.29% 3.05% 3.27% 2.99% 2.65% 2.54% 3.19% 3.52% 3.26% 2.68% 2003 2.60% 2.98% 3.02% 2.22% 2.06% 2.11% 2.11% 2.16% 2.32% 2.04% 1.77% 1.88% 2.27% 2002 1.14% 1.14% 1.48% 1.64% 1.18% 1.07% 1.46% 1.80% 1.51% 2.03% 2.20% 2.38% 1.59% 2001 3.73% 3.53% 2.92% 3.27% 3.62% 3.25% 2.72% 2.72% 2.65% 2.13% 1.90% 1.55% 2.83% 2000 2.74% 3.22% 3.76% 3.07% 3.19% 3.73% 3.66% 3.41% 3.45% 3.45% 3.45% 3.39% 3.38% 1999 1.67% 1.61% 1.73% 2.28% 2.09% 1.96% 2.14% 2.26% 2.63% 2.56% 2.62% 2.68% 2.19% 1998 1.57% 1.44% 1.37% 1.44% 1.69% 1.68% 1.68% 1.62% 1.49% 1.49% 1.55% 1.61% 1.55% 1997 3.04% 3.03% 2.76% 2.50% 2.23% 2.30% 2.23% 2.23% 2.15% 2.08% 1.83% 1.70% 2.34% 1996 2.73% 2.65% 2.84% 2.90% 2.89% 2.75% 2.95% 2.88% 3.00% 2.99% 3.26% 3.32% 2.93% 1995 2.80% 2.86% 2.85% 3.05% 3.19% 3.04% 2.76% 2.62% 2.54% 2.81% 2.61% 2.54% 2.81% 1994 2.52% 2.52% 2.51% 2.36% 2.29% 2.49% 2.77% 2.90% 2.96% 2.61% 2.67% 2.67% 2.61% 1993 3.26% 3.25% 3.09% 3.23% 3.22% 3.00% 2.78% 2.77% 2.69% 2.75% 2.68% 2.75% 2.96% 1992 2.60% 2.82% 3.19% 3.18% 3.02% 3.09% 3.16% 3.15% 2.99% 3.20% 3.05% 2.90% 3.03% 1991 5.65% 5.31% 4.90% 4.89% 4.95% 4.70% 4.45% 3.80% 3.39% 2.92% 2.99% 3.06% 4.25% 1990 5.20% 5.26% 5.23% 4.71% 4.36% 4.67% 4.82% 5.62% 6.16% 6.29% 6.27% 6.11% 5.39% 1989 4.67% 4.83% 4.98% 5.12% 5.36% 5.17% 4.98% 4.71% 4.34% 4.49% 4.66% 4.65% 4.83% 1988 4.05% 3.94% 3.93% 3.90% 3.89% 3.96% 4.13% 4.02% 4.17% 4.25% 4.25% 4.42% 4.08% 1987 1.46% 2.10% 3.03% 3.78% 3.86% 3.65% 3.93% 4.28% 4.36% 4.53% 4.53% 4.43% 3.66% 1986 3.89% 3.11% 2.26% 1.59% 1.49% 1.77% 1.58% 1.57% 1.75% 1.47% 1.28% 1.10% 1.91% 1985 3.53% 3.52% 3.70% 3.69% 3.77% 3.76% 3.55% 3.35% 3.14% 3.23% 3.51% 3.80% 3.55% 1984 4.19% 4.60% 4.80% 4.56% 4.23% 4.22% 4.20% 4.29% 4.27% 4.26% 4.05% 3.95% 4.30% 1983 3.71% 3.49% 3.60% 3.90% 3.55% 2.58% 2.46% 2.56% 2.86% 2.85% 3.27% 3.79% 3.22% 1982 8.39% 7.62% 6.78% 6.51% 6.68% 7.06% 6.44% 5.85% 5.04% 5.14% 4.59% 3.83% 6.16% 1981 11.83% 11.41% 10.49% 10.00% 9.78% 9.55% 10.76% 10.80% 10.95% 10.14% 9.59% 8.92% 10.35% 1980 13.91% 14.18% 14.76% 14.73% 14.41% 14.38% 13.13% 12.87% 12.60% 12.77% 12.65% 12.52% 13.58% 1979 9.28% 9.86% 10.09% 10.49% 10.85% 10.89% 11.26% 11.82% 12.18% 12.07% 12.61% 13.29% 11.22% 1978 6.84% 6.43% 6.55% 6.50% 6.97% 7.41% 7.70% 7.84% 8.31% 8.93% 8.89% 9.02% 7.62% 1977 5.22% 5.91% 6.44% 6.95% 6.73% 6.87% 6.83% 6.62% 6.60% 6.39% 6.72% 6.70% 6.50% 1976 6.72% 6.29% 6.07% 6.05% 6.20% 5.97% 5.35% 5.71% 5.49% 5.46% 4.88% 4.86% 5.75% 1975 11.80% 11.23% 10.25% 10.21% 9.47% 9.39% 9.72% 8.60% 7.91% 7.44% 7.38% 6.94% 9.20% 1974 9.39% 10.02% 10.39% 10.09% 10.71% 10.86% 11.51% 10.86% 11.95% 12.06% 12.20% 12.34% 11.03% 1973 3.65% 3.87% 4.59% 5.06% 5.53% 6.00% 5.73% 7.38% 7.36% 7.80% 8.25% 8.71% 6.16% 1972 3.27% 3.51% 3.50% 3.49% 3.23% 2.71% 2.95% 2.94% 3.19% 3.42% 3.67% 3.41% 3.27% 1971 5.29% 5.00% 4.71% 4.16% 4.40% 4.64% 4.36% 4.62% 4.08% 3.81% 3.28% 3.27% 4.30% 1970 6.18% 6.15% 5.82% 6.06% 6.04% 6.01% 5.98% 5.41% 5.66% 5.63% 5.60% 5.57% 5.84% 1969 4.40% 4.68% 5.25% 5.52% 5.51% 5.48% 5.44% 5.71% 5.70% 5.67% 5.93% 6.20% 5.46% 1968 3.65% 3.95% 3.94% 3.93% 3.92% 4.20% 4.49% 4.48% 4.46% 4.75% 4.73% 4.72% 4.27% 1967 3.46% 2.81% 2.80% 2.48% 2.79% 2.78% 2.77% 2.45% 2.75% 2.43% 2.74% 3.04% 2.78% 1966 1.92% 2.56% 2.56% 2.87% 2.87% 2.53% 2.85% 3.48% 3.48% 3.79% 3.79% 3.46% 3.01% 1965 0.97% 0.97% 1.29% 1.62% 1.62% 1.94% 1.61% 1.94% 1.61% 1.93% 1.60% 1.92% 1.59% 1964 1.64% 1.64% 1.31% 1.31% 1.31% 1.31% 1.30% 0.98% 1.30% 0.97% 1.30% 0.97% 1.28% 1963 1.33% 1.00% 1.33% 0.99% 0.99% 1.32% 1.32% 1.32% 0.99% 1.32% 1.32% 1.64% 1.24% 1962 0.67% 1.01% 1.01% 1.34% 1.34% 1.34% 1.00% 1.34% 1.33% 1.33% 1.33% 1.33% 1.20% 1961 1.71% 1.36% 1.36% 1.02% 1.02% 0.68% 1.35% 1.01% 1.35% 0.67% 0.67% 0.67% 1.07% 1960 1.03% 1.73% 1.73% 1.72% 1.72% 1.72% 1.37% 1.37% 1.02% 1.36% 1.36% 1.36% 1.46% 1959 1.40% 1.05% 0.35% 0.35% 0.35% 0.69% 0.69% 1.04% 1.38% 1.73% 1.38% 1.73% 1.01% 1958 3.62% 3.25% 3.60% 3.58% 3.21% 2.85% 2.47% 2.12% 2.12% 2.12% 2.11% 1.76% 2.73% 1957 2.99% 3.36% 3.73% 3.72% 3.70% 3.31% 3.28% 3.66% 3.28% 2.91% 3.27% 2.90% 3.34% 1956 0.37% 0.37% 0.37% 0.75% 1.12% 1.87% 2.24% 1.87% 1.86% 2.23% 2.23% 2.99% 1.52% 1955 -0.74% -0.74% -0.74% -0.37% -0.74% -0.74% -0.37% -0.37% 0.37% 0.37% 0.37% 0.37% -0.28% 1954 1.13% 1.51% 1.13% 0.75% 0.75% 0.37% 0.37% 0.00% -0.37% -0.74% -0.37% -0.74% 0.32% 1953 0.38% 0.76% 1.14% 0.76% 1.14% 1.13% 0.37% 0.75% 0.75% 1.12% 0.75% 0.75% 0.82% 1952 4.33% 2.33% 1.94% 2.33% 1.93% 2.32% 3.09% 3.09% 2.30% 1.91% 1.14% 0.75% 2.29% 1951 8.09% 9.36% 9.32% 9.32% 9.28% 8.82% 7.47% 6.58% 6.97% 6.50% 6.88% 6.00% 7.88% 1950 -2.08% -1.26% -0.84% -1.26% -0.42% -0.42% 1.69% 2.10% 2.09% 3.80% 3.78% 5.93% 1.09% 1949 1.27% 1.28% 1.71% 0.42% -0.42% -0.83% -2.87% -2.86% -2.45% -2.87% -1.65% -2.07% -0.95% 1948 10.23% 9.30% 6.85% 8.68% 9.13% 9.55% 9.91% 8.89% 6.52% 6.09% 4.76% 2.99% 7.74% 1947 18.13% 18.78% 19.67% 19.02% 18.38% 17.65% 12.12% 11.39% 12.75% 10.58% 8.45% 8.84% 14.65% 1946 2.25% 1.69% 2.81% 3.37% 3.35% 3.31% 9.39% 11.60% 12.71% 14.92% 17.68% 18.13% 8.43% 1945 2.30% 2.30% 2.30% 1.71% 2.29% 2.84% 2.26% 2.26% 2.26% 2.26% 2.26% 2.25% 2.27% 1944 2.96% 2.96% 1.16% 0.57% 0.00% 0.57% 1.72% 2.31% 1.72% 1.72% 1.72% 2.30% 1.64% 1943 7.64% 6.96% 7.50% 8.07% 7.36% 7.36% 6.10% 4.85% 5.45% 4.19% 3.57% 2.96% 6.00% 1942 11.35% 12.06% 12.68% 12.59% 13.19% 10.88% 11.56% 10.74% 9.27% 9.15% 9.09% 9.03% 10.97% 1941 1.44% 0.71% 1.43% 2.14% 2.86% 4.26% 5.00% 6.43% 7.86% 9.29% 10.00% 9.93% 5.11% 1940 -0.71% 0.72% 0.72% 1.45% 1.45% 2.17% 1.45% 1.45% -0.71% 0.00% 0.00% 0.71% 0.73% 1939 -1.41% -1.42% -1.42% -2.82% -2.13% -2.13% -2.13% -2.13% 0.00% 0.00% 0.00% 0.00% -1.30% 1938 0.71% 0.00% -0.70% -0.70% -2.08% -2.08% -2.76% -2.76% -3.42% -4.11% -3.45% -2.78% -2.01% 1937 2.17% 2.17% 3.65% 4.38% 5.11% 4.35% 4.32% 3.57% 4.29% 4.29% 3.57% 2.86% 3.73% 1936 1.47% 0.73% 0.00% -0.72% -0.72% 0.73% 1.46% 2.19% 2.19% 2.19% 1.45% 1.45% 1.04% 1935 3.03% 3.01% 3.01% 3.76% 3.76% 2.24% 2.24% 2.24% 0.74% 1.48% 2.22% 2.99% 2.56% 1934 2.33% 4.72% 5.56% 5.56% 5.56% 5.51% 2.29% 1.52% 3.03% 2.27% 2.27% 1.52% 3.51% 1933 -9.79% -9.93% -10.00% -9.35% -8.03% -6.62% -3.68% -2.22% -1.49% -0.75% 0.00% 0.76% -5.09% 1932 -10.06% -10.19% -10.26% -10.32% -10.46% -9.93% -9.93% -10.60% -10.67% -10.74% -10.20% -10.27% -10.30% 1931 -7.02% -7.65% -7.69% -8.82% -9.47% -10.12% -9.04% -8.48% -9.64% -9.70% -10.37% -9.32% -8.94% 1930 0.00% -0.58% -0.59% 0.59% -0.59% -1.75% -4.05% -4.62% -4.05% -4.62% -5.20% -6.40% -2.66% 1929 -1.16% 0.00% -0.58% -1.17% -1.16% 0.00% 1.17% 1.17% 0.00% 0.58% 0.58% 0.58% 0.00% 1928 -1.14% -1.72% -1.16% -1.16% -1.15% -2.84% -1.16% -0.58% 0.00% -1.15% -0.58% -1.16% -1.15% 1927 -2.23% -2.79% -2.81% -3.35% -2.25% -0.56% -1.14% -1.15% -1.14% -1.14% -2.26% -2.26% -1.92% 1926 3.47% 4.07% 2.89% 4.07% 2.89% 1.14% -1.13% -1.69% -1.13% -0.56% -1.67% -1.12% 0.94% 1925 0.00% 0.00% 1.17% 1.18% 1.76% 2.94% 3.51% 4.12% 3.51% 2.91% 4.65% 3.47% 2.44% 1924 2.98% 2.38% 1.79% 0.59% 0.59% 0.00% -0.58% -0.58% -0.58% -0.58% -0.58% 0.00% 0.45% 1923 -0.59% -0.59% 0.60% 1.20% 1.20% 1.80% 2.38% 3.01% 3.61% 3.59% 2.98% 2.37% 1.80% 1922 -11.05% -8.15% -8.74% -7.73% -5.65% -5.11% -5.08% -6.21% -5.14% -4.57% -3.45% -2.31% -6.10% 1921 -1.55% -5.64% -7.11% -10.84% -14.08% -15.79% -14.90% -12.81% -12.50% -12.06% -12.12% -10.82% -10.85% 1920 16.97% 20.37% 20.12% 21.56% 21.89% 23.67% 19.54% 14.69% 12.36% 9.94% 7.03% 2.65% 15.90% 1919 17.86% 14.89% 17.14% 17.61% 16.55% 14.97% 15.23% 14.94% 13.38% 13.13% 13.50% 14.55% 15.31% 1918 19.66% 17.50% 16.67% 12.70% 13.28% 13.08% 17.97% 18.46% 18.05% 18.52% 20.74% 20.44% 17.26% 1917 12.50% 15.38% 14.29% 18.87% 19.63% 20.37% 18.52% 19.27% 19.82% 19.47% 17.39% 18.10% 17.80% 1916 2.97% 4.00% 6.06% 6.00% 5.94% 6.93% 6.93% 7.92% 9.90% 10.78% 11.65% 12.62% 7.64% 1915 1.00% 1.01% 0.00% 2.04% 2.02% 2.02% 1.00% -0.98% -0.98% 0.99% 0.98% 1.98% 0.92% 1914 2.04% 1.02% 1.02% 0.00% 2.06% 1.02% 1.01% 3.03% 2.00% 1.00% 0.99% 1.00% 1.35%

The Inflation Calculator utilizes historic consumer price index data from the U.S. to determine how much a fixed list of commonly used items or services, used to track inflation and known as a "market basket," is worth, adjusted for a given year. Simply enter an amount and the year it pertains to, followed by the year the inflation-adjusted amount pertains to.

There is also a Forward Flat Rate Inflation Calculator and Backward Flat Rate Inflation Calculator that can be used for theoretical scenarios to determine the inflation-adjusted amounts given an amount that is adjusted based on the number of years and inflation rate. Historically, inflation rates hover around 3% in the U.S. and many other developed countries, making it a safe assumption. However, feel free to adjust as needed.

What is Inflation?

Inflation is defined as a general increase in the prices of goods and services, and a fall in the purchasing value of money. Inflation can be artificial in that the authority, such as a central bank, king, or government, can control the supply of the money in circulation. If additional money is added into an economy, each unit of money in circulation will be worth less. The inflation rate itself is generally conveyed as a percentage increase in prices over 12 months. Most developed nations try to sustain an inflation rate between 2-3% through fiscal and monetary policy.

Hyperinflation

Hyperinflation is excessive inflation that rapidly erodes the real value of a currency. It usually occurs when there is a significant increase in money supply with little to no change in gross domestic product. Examples of hyperinflation can be seen in the countries of Ukraine in the early 1990s and Brazil from 1980 until 1994, where they endured long periods of hyperinflation and their currencies became essentially valueless. These hyperinflated economies caused terrible hardships for their people; Ukrainians and Brazilians had to cope by using stabilized foreign currencies and stocking up on finite resources that could retain value such as gold. Another well-known example of hyperinflation was Germany in the 1920s when the government took stimulus measures such as printing money to pay for WWI. This happened at the same time as Germany was required to pay 132 billion marks in war reparations. This resulted in economic activity crumbling and shortages. With too much money and not enough goods and services, prices doubled every 3 days! The papiermark, the German currency at the time, lost so much value that people were using it in place of firewood to heat their homes. The effects of hyperinflation were so severe that many people lived in poverty or fled the country.

While hyperinflation can cause immense hardship on an economy, it is considered healthy to have moderate levels of inflation from year to year. Because money will be worth less in the future, there is an incentive for consumers to spend instead of stashing it away, and this incentive plays a key role in ensuring a healthy economy.

Deflation

While inflation is not entirely good or bad depending on whether it is moderate or severe, deflation, the opposite of inflation, is seldom welcome in any economy. Deflation is defined as the general reduction of prices for goods and services. In such a scenario, consumers are not incentivized to spend since their money is forecasted to have more purchasing power in the future. This puts the brakes on and can even reverse what should be upward trending economies. The Great Depression came with something called the deflationary spiral. The theory behind a deflationary spiral is that as prices fall for goods and services, there is less profit. With less profit comes less spending. This in turn leads to even lower prices for goods and services, which forms a negative loop that can be immensely difficult to recover from.

Why Inflation Occurs

Macroeconomic theories try to explain why inflation occurs and how best to regulate it. Keynesian economics, which served as the standard economic model in developed nations for most of the twentieth century and is still widely used today, says that when there are gaping imbalances between the supply and demand of goods and services, large scale inflation or deflation can occur.

Cost-Push inflation —Take for example the cost of oil going up due to political turmoil; because so many goods and services depend on oil, their prices will also increase to account for the higher costs associated with running a business that involves oil as an expense. This is called cost-push inflation.

—Take for example the cost of oil going up due to political turmoil; because so many goods and services depend on oil, their prices will also increase to account for the higher costs associated with running a business that involves oil as an expense. This is called cost-push inflation. Demand-Pull inflation —This sort of inflation happens when demand becomes higher than an economy's ability to produce. Because there are not enough goods and services going around for everyone, higher amounts of currency are more readily exchanged for them.

—This sort of inflation happens when demand becomes higher than an economy's ability to produce. Because there are not enough goods and services going around for everyone, higher amounts of currency are more readily exchanged for them. Built-in inflation—Built-in inflation, sometimes called hangover inflation, is a type of inflation that is a result of past events, the effects of which persist in the present. It is strongly related to cost-push inflation and demand-pull inflation, as the three types of inflation are the major determinants of current inflation rate. It is affected by both subjective and objective factors that generally results in the persistence of inflation through factors such as inflationary expectations and the price/wage spiral.

The Monetarists A group of economists (led by Milton Friedman) named the Monetarists believed that money supply is the main player in inflation, not markets. For instance, the Federal Reserve (the central bank in the U.S.) can print more money to increase supply or sell Treasury bills to decrease it. Public institutions play a major role in stabilizing their respective currencies through monetary policy. Their ideals are based on the Quantity Theory of Money, which states that changes in money supply will change the value of the currency. The Equation of Exchange best illustrates this: MV = PY Where: M = money supply

V = velocity of money, defined as how many times a unit of currency is involved in transfers per year

P = price level

Y = economic output of goods and services In the Equation of Exchange, total spending (MV) is equal to total sales revenue (PY). V and Y are generally considered constant by economists; the number of transactions a currency goes through a year and the total economic output are certainly less volatile than the money supply or price level. By assuming V and Y to be relatively constant, what's left over are M and P, which leads to the Quantity Theory of Money which states that the money supply is directly proportional to the value of the currency.

In reality, a mixture of both Keynesian and Monetarist policies are used. Although Keynesians and Monetarists have their differences, they do admit that there are necessities from the opposing side. For instance, Keynesians do not completely disregard the role that money supply has in economies, just as Monetarists do not completely disregard manipulating the demand for goods and services to fix inflation.

How is Inflation Calculated?

In the U.S., the Department of Labor is responsible for calculating inflation from year to year. Usually, a basket of goods and services on the market are put together and the costs associated with them are compared at various periods. These figures are then averaged and weighted using various formulas and the end result in the U.S. is a number called the Consumer Price Index (CPI).

As an example, to find the inflation from January 2016 to January 2017, first look up the CPI for both months. Historical CPI data can be found on The Bureau of Labor Statistics website:

Jan. 2016: 236.916

Jan. 2017: 242.839

Calculate the difference:

242.839 - 236.916 = 5.923

Calculate the ratio of this difference to the former CPI:

5.923/236.916 = 2.5%

The inflation from January 2016 to January 2017 was 2.5%. When the CPI for the former period is greater than the latter, the result is deflation, rather than inflation.

Problems with Measuring Inflation

While the example given above to calculate CPI might portray inflation as a simple process, in the real world, measuring true inflation of currencies can prove to be quite difficult.

Take for instance, the basket of goods and services used to determine inflation from period to period. It is hard to distinguish whether the prices for these goods and services fluctuated based on changes in quality or inflation. For example, did the price of a computer really inflate that much, or was it due to new breakthrough technology that made them cost more?

Dramatic rises or falls in prices of certain things can destabilize the situation. For instance, hikes in oil prices will lead to higher inflation, but this is temporary, and may create false impressions of higher inflation.

People who are part of different demographics can be affected differently by inflation rates. As an example, high oil prices create higher inflation for truck drivers, but affect stay-at-home mothers to a lesser degree.

While CPI is the most widely used index to determine inflation, there are others for more specific purposes. CPI was previously known as the Harmonized Index of Consumer Prices (HICP) in the European Union. There is also an adjusted version of CPI called CPIH that includes housing costs such as mortgage interest payments. CPIY is essentially CPI without indirect taxes such as value-added tax (VAT) and excise duty, and is useful for determining inflation without tax increases that last just a year. Excise duty is a tax charged on goods produced within a country. CPILFENS, the Consumer Price Index for All Urban Consumers Less Food and Energy, is considered a less volatile version of CPI because it doesn't have food and energy in its own basket. Food and energy can be very volatile in nature, and can result in an inaccurate representation of inflation. For instance, weather has drastic impacts on food supply, and in turn food prices.

Practical Tips on How to Beat Inflation

Inflation is most impactful to people who hold large amounts of liquid cash sitting idle. Using the inflation rate calculated above, a checking account (that doesn't earn interest) with $50,000 will result in a loss in real value due to inflation of $1,250 by period's end. It can be seen that when it comes to protecting money from inflation, whether moderate or severe, it is generally best to do something other than storing it somewhere that doesn't earn interest. Inflation is the main reason why the conventional advice peddled by financial gurus is not to save cash, but to spend or invest instead. In a world where moderate inflation is the norm, there is little choice but to spend, invest, or be willing to accept a degree of loss due to inflation.

Commodities

Investing in commodities, which include gold, silver, oil, copper, and many raw materials or agricultural products, is one of the popular ways through which a person can protect themselves from inflation, because commodities are items that have intrinsic value. In addition, during times of high inflation, as money loses its value, demand for commodities can increase their value. For many centuries, gold was traditionally viewed as an effective resource with which a person could hedge against inflation because it is a finite resource with value that can be stored easily. While other precious metals can be used to hedge against inflation, gold is the most popular.

TIPS

In the U.S., there are financial instruments called TIPS, or Treasury Inflation-Protected Securities. These are bonds issued by the U.S. Treasury that specifically provide protection against inflation. Because the principal of a TIPS is proportional to inflation, as measured by indices such as the CPI, TIPS act as a relatively effective hedge against periods of high inflation. They usually only make up very small portions of people's portfolios, but anyone seeking extra protection can choose to allocate more room in their portfolio toward TIPS. Because they are largely unrelated to stocks, which are usually the bulk of portfolios, they are also great for diversification purposes. The maturation of TIPS can also be extended to earn term premiums, without risk of inflation, unlike other bonds. Other countries also offer similar inflation-indexed bonds, such as the United Kingdom's index-linked gilt, Mexican Udibonos, or German Bund index.

Besides commodities and TIPS, it is also common for people to purchase real estate property, stock, funds, art, antiques and other assets to hedge against inflation.