Inflation Rate Calculation
We can calculate the money rate if we are given the inflation
rate and real rate prevailing in the economy. The formula for calculating
inflation rate is known fisher effect.
Formula for inflation Rate
(1+Money Rate) = (1+Inflation Rate)(1+Real Rate)
Inflation Rate = (1+Money Rate)/(1+Real Rat) -1 (Re
arranging the fisher formula)
Simple Example
For example the real rate in the economy is 4% and the money
rate is %, then inflation rate can be calculated as under
Inflation Rate = (1.08)/(1.04)-1
= (1.0384)-1
=.0384
=3.8%
Inflation rate can be calculated by subtracting the real rate
from the money rate. However for more accurate calculation the fisher formula
may be used.
