Inflation

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.

$A=PR^T$

Where:
$A=$ 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 $=650\times 1.04$
Price $=676$

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.

$A=PR^T$
$A=650(1.04)^5$
$A=790.824$

After five years the phone will cost $791.

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