Inflation refers to an increase in the price of goods and services over time.

The Formula

As inflation grows exponentially, the compound interest formula can be used.


A= price after time, T
P= original price
T= time in years
R= 1+\dfrac r{100} where r is the inflation rate

Example 1

The cost of a phone is $650 and the average inflation rate is 4% p.a.

a) What is the price of the phone after one year?

Find the value of R.

R=1+\dfrac 4{100}=1.04

As this is the first year, we can simply multiply the cost by the growth rate.

Price=650\times 1.04

The price of the phone after one year is $676.

b) What will the phone cost after five years (write your answer to the nearest dollar)?

Use the formula.


After five years the phone will cost $791.

See also

Compound Interest
Simple Interest
Effective Interest Rate