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The Inflation Calculator uses average U.S. consumer price index data to determine the value of a setlist of widely used items or services, known as a market basket to measure inflation, that has been adjusted for a given year. This money inflation calculator can calculate inflation for a given period of time or between specific years. That is why it is an inflation calculator by year. It also considers the demographic location for computing inflation because inflation varies from region to region. We will discuss the inflation, hyperinflation, deflation, causes of inflation in detail to make a proper understanding for our users.
What is Inflation?
Inflation is characterized as a general increase in product and service prices and a decrease in the value of money. Inflation can be irrational as institutions can control the supply of the currency under circulation like a central bank, a king, or a government. Once extra money is applied to an economy, each unit of money is less valuable. The inflation rate itself typically represents a 12-month price increase. Most developed countries seek to maintain inflation through fiscal and monetary policy, about 2-3 percent. Calculate the inflation rate using the inflation calculator USD above.
What is Hyperinflation?
Hyperinflation is extreme inflation, rapidly eroding a currency's true value. This usually happens when the supply of cash with little or no change in the gross domestic product is significantly increased. Hyperinflation has taken place in Brazil from 1980 to 1994 and in Ukraine in the early '90s and, where they have experienced long periods of hyperinflation. Such hyper-inflated markets created horrible problems for the population. Brazilians and Ukrainians were forced to deal with stable foreign currencies and store finite resources, such as gold. In the 1920s, Germany took stimulus measures such as prints of money to pay for the First World War, which is another well-known example of hyperinflation. That happened simultaneously, with Germany paying 132 billion marks in war reparations. This led to a recession and limited economic activity. Prices multiplied every second day with too much demand and little goods and services. The German currency at that time was Papiermark, which lost so much value that people used it to heat their homes instead of firewood. Hyperinflation has had such serious consequences that many people had to left the country or lived in severe poverty.
While hyperinflation can cause enormous economic problems, the inflation rate from year to year is considered moderate. Because money is worthless in the future, customers will be motivated to spend it, and this opportunity will play a crucial part in ensuring a healthy economy. Use the USD inflation calculator above to find the inflation rate in the U.S.
What is Deflation?
Although inflation is no good or bad depending on whether it is low or extreme, deflation is widely recognized as a bad thing in any country, as opposed to inflation. The general price decline in goods and services is known as deflation. In such a case, customers are not encouraged to spend because their money is expected to be able to buy more in the future. It slows and can even undo what upward trending markets should be. The Great Depression began with what was called the wave of depression or deflationary spiral. When prices fall for goods and services, there is less benefit in a deflationary spiral. Less income means fewer expenses. This, in effect, leads to lower costs for products and services, which is a destructive path, which is very hard to recover from in any situation. You can use the U.S. dollar inflation calculator to get the inflation rate in the United States.
How to use the Inflation Rate Calculator?
To calculate inflation using a currency inflation calculator, enter the amount in dollars in the first input box. This calculator is also called the U.S. inflation calculator because it calculates the inflation by taking the amount in U.S. dollars. You can change the location to different countries if you want. Enter the base year and end year in the corresponding input boxes. Select the country from the drop-down and hit the "Calculate" button. The dollar inflation calculator will show the inflation rate for the given amount, time period, and location.
Why inflation happens at all?
Theories of macroeconomics attempt to explain how to control inflation and why it occurs in the first place. Keynes economics, which for the majority of the 20th century acted as the standard economic paradigm in developed countries and is still commonly used today, claims that large-scale inflation or defrost will arise when there are differences between supply and demand in goods and services.
Reasons and types of inflation
These are types and reasons for inflation.
Cost-Push inflation:
Take, for instance, the rising cost of oil because of political unrest. Because so many goods and services rely on energy, prices will also rise to offset the increased costs of operating a business that uses oil for its production. It is known as cost-push inflation.
Demand-Pull inflation:
This kind of inflation happens as demand rises above the production capacity of an economy. As there are fewer goods and services, low currency amounts are traded for them more conveniently.
Built-in inflation:
Built-in inflation is a form of inflation that is the result of events from past years that tend to have consequences in the present. It is also known as hangover inflation. It is closely associated with demand-pull inflation and cost-push inflation because these three inflation forms are the main drivers of current inflation. It is influenced by objective and subjective causes, which usually contribute to the continuation of inflation by factors like price or wage spiral and inflation.
How is Inflation Calculated?
In the United States, the Department of Labor reports the CPI and inflation year by year. In addition, a list of goods and services is assembled, and the associated costs are measured at different time periods. The numbers are then weighted and calculated using different formulas, and the end result in the United States is a statistic known as the Consumer Price Index (CPI). You can also use the CPI inflation calculator above to calculate inflation on one click.
Let's find inflation between January 2016 and January 2017. We have to check CPI for both of these months. You can find the historical CPI data in the table given below, or you can check it on the website of the U.S Bureau of Labor Statistics.
CPI for Jan. 2016 is 236.916, and the CPI for Jan. 2017 is 242.839.
Compute the difference between the CPI of both months.
\(242.839 - 236.916 = 5.923\)
Calculate the difference ratio to the Jan 2016 CPI:
\(\dfrac{5.923}{236.916} = 2.5 \%\)
Inflation 2.5 was calculated percent between January 2016 and January 2017. If the CPI is larger than the previous period, the effect is deflation, not inflation. How much percentage was increased or decreased using our Percentage Increase Calculator.
Inflation Measurement Challenges
While this example of CPI measurement might display inflation as a simple process, it can, in fact, be quite difficult to measure true currency inflation in the real world.
Take, for example, the basket of goods and services used for inflation calculation from time to time. It is difficult to determine whether price fluctuations for these goods and services are based on inflation or quality. The cost of a machine often soared so much or was because of the new technology that cost them more.
Sudden fall or rise in the prices of commodities can be destabilized by dramatic price increases or drops. For example, oil price rises can cause increased inflation, but this is transient and can produce artificially strong inflationary expectations.
Individuals who belong to different countries can be differently infected with inflation. A hike in oil prices affects transporters with a great deal, but people who work from home are affected less.
While CPI is the most widely used inflation index, there are other indexes for more specific purposes. CPI was previously referred to as the Harmonized Index of Consumer Prices (HICP). A modified version of the CPI is also available, called CPIH, covering mortgage interest payments and the cost of housing. In fact, CPIY is CPI-free without indirect taxation such as excise duty and VAT and is useful for determining tax-free inflation that lasts only a year. Excise is a levy on goods generated in a country. CPILFENS is considered a less variable CPI because it doesn't have food and energy in their basket. CPILFENS stands for Consumer Price Index for All Urban Consumers Less Food and Energy. Energy and food can be extremely volatile and cause inflation to be falsely portrayed. For example, climate affects the availability of food and food prices drastically. You can use our inflation adjuster to find inflation between any time periods.
How to fight and beat inflation?
Inflation is especially impactful for people who hold vast amounts of cash and do not use it. By using the inflation rate above, a checking account of $50,000, which does not earn interest, corresponds to a decrease of true value due to inflation of $1,250 by the end of the period. It can be seen that in saving money from inflation, whether mild or serious, something else is generally better than to save it somewhere that is not of value. Inflation is the principal reason that conventional guidance from finance experts is not about saving money, but about investing or spending. There is little alternative but to spend, to save or to accept a certain loss from inflation, in an environment in which moderate inflation is the rule. To beat inflation, you should be aware of the current and previous inflation rates. Use the inflation converter above to get figures for inflation if you are up against inflation.
Investment in Commodities
Investing in commodities, such as copper, silver, oil, gold, and many other agricultural or raw materials, is a common way of protecting an individual from inflation since commodities are inherently valuable. Further, the demand for commodity products can increase their value in times of high inflation when money loses value. Gold has historically been seen for many years as a tool for avoiding inflation, as it is a finite resource that can be conveniently stored. Gold is the most common, while other precious metals can be used for inflation prevention.
Investment in TIPS
In the United States, the TIPS or Treasury inflation-protected securities are financial instruments. These are U.S. bonds that provide unique protection against inflation. Since the TIPS concept is equal to inflation, as expressed in indexes like the CPI, TIPS serves as a fairly effective hedge against high inflation cycles. Typically they only constitute very small sections of the portfolio of individuals, but anyone who is looking for additional protection can opt to give their portfolio more room for TIPS. Since the majority of portfolios are largely unrelated to stocks, they are also perfect for diversifying. By comparison to other bonds, the maturation of TIPS may also be prolonged to receive term premiums. Specific inflation-indexed bonds are available in other countries, such as the German Bund index, British index-linked gilt, and the Udibonos in Mexico.
It is also common for people to buy stocks, property, antiques, arts, and many other things in order to offset inflation beyond commodities and TIPS.
References
CPI Home: U.S. Bureau of Labor Statistics. (2020). Retrieved 12 February 2020, from https://www.bls.gov/cpi/