Compute the annual inflation rate by using the monthly inflation rates over the last (available) twelve...

Compute the annual inflation rate by using the monthly inflation rates over the last (available) twelve months. Include the effect of compounding.

Expert Solution

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2020	2.5	2.3	1.5	0.3	0.1	0.6	1	1.3	1.4
2019										1.8	2.1	2.3

For computing the 12 Month average considering the effect of Compounding, We have to use Geometric Average of Monthly Inflation Rates.

Geometric Average = the nth root of the product of n numbers

Average = [(1+0.018)(1+0.021)(1+0.023)(1+0.025)(1+0.023)(1+0.015)(1+0.003)(1+0.001)(1+0.006)(1+0.001)(1+0.013)(1+0.014)]^(1/12) - 1

Average = 1.014 - 1

Average = 0.014 (or) 1.4%

jeff jeffy answered 3 years ago

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