Question

Find the inflation rate based in the information presented in the table below. For you calculations assume a fix consumption basket consisting of 3 footballs and 4 basketballs, and year 1 as the base year.

Year	Price of Footballs	Price of Basketballs
Year 1	$10	$12
Year 2	12	15
Year 3	14	18

Answer 1

Market basket consist of 3 footballs and 4 basketballs

Year 1 is the base year.

The value CPI in base year is always 100.

Calculate the value of market basket in Year 1 -

Value = (Quantity of footballs * Price of football) + (Quantity of basketballs * Price of basketballs)

Value = (3 * $10) + (4 * $12) = $30 + $48 = $78

The value of market basket in Year 1 is $78

Calculate the value of market basket in Year 2 -

Value = (Quantity of footballs * Price of football) + (Quantity of basketballs * Price of basketballs)

Value = (3 * $12) + (4 * $15) = $36 + $60 = $96

The value of market basket in Year 2 is $96

Calculate the value of market basket in Year 3 -

Value = (Quantity of footballs * Price of football) + (Quantity of basketballs * Price of basketballs)

Value = (3 * $14) + (4 * $18) = $42 + $72 = $114

The value of market basket in Year 3 is $114

Calculate the CPI in year 2 -

CPI = [value of market basket in year 2/value of market basket in year 1] * 100

CPI = [$96/$78] * 100 = 123.07

The CPI in Year 2 is 123.07

Calculate the CPI in year 3 -

CPI = [value of market basket in year 3/value of market basket in year 1] * 100

CPI = [$114/$78] * 100 = 146.15

The CPI in Year 3 is 146.15

Calculate the inflation rate in Year 2 -

Inflation rate = [(CPI in year 2 - CPI in year 1)/CPI in year 1] * 100

Inflation rate = [(123.07 - 100)/100] * 100 = 23.07%

The inflation rate in Year 2 is 23.07%

Calculate the inflation rate in Year 3 -

Inflation rate = [(CPI in year 3 - CPI in year 2)/CPI in year 2] * 100

Inflation rate = [(146.15 - 123.07)/123.07] * 100 = 18.75%

The inflation rate in Year 3 is 18.75%.