How do I adjust for inflation?

Question

I will begin by saying that I have very little knowledge about economics, so don't make any presumptions.

My problem is that I want to calculate the actual value of gold in Swedish Krona(SEK) for the last 15 years, accounting for the overall inflation. I have calculated some average prices as well as having researched the inflation rate of the Swedish Krona. The information is listed below.

Average Price/Gram
Year 2000: 81,21 kr
Year 2001: 89,90 kr
Year 2002: 96,54 kr
Year 2003: 94,65 kr
Year 2004: 96,89 kr
Year 2005: 105,63 kr
Year 2006: 144,82 kr
Year 2007: 149,54 kr
Year 2008: 179,83 kr
Year 2009: 236,83 kr
Year 2010: 279,83 kr
Year 2011: 324,20 kr
Year 2012: 363,68 kr
Year 2013: 299,28 kr
Year 2014: 275,83 kr
Year 2015: 315,10 kr

Yearly Inflation
Year 2000: 0,98%
Year 2001: 2,66%
Year 2002: 2,08%
Year 2003: 1,27%
Year 2004: 0,28%
Year 2005: 0,88%
Year 2006: 1,64%
Year 2007: 3,45%
Year 2008: 0,90%
Year 2009: 0,58%
Year 2010: 2,34%
Year 2011: 2,29%
Year 2012: -0,05%
Year 2013: 0,14%
Year 2014: -0,31%
Year 2015: 0,05%

Now, I request nothing more than a methodology. If you know of a somewhat accurate formula that would result in inflation adjusted values, please do share. Please remember to also include an example of how you would make use of it. Thank you for your time and effort.

Answer 1

First it would be about the index used to take account inflation.

There are different indexes for calculating inflation, for example there could be by national prices for consumer or national prices for producer or other references as index calculations. Every index has its own methodology.

To take this example and crunch it with the numbers provided we'll assume the inflation was calculated with the National prices for consumer with a basic market basket of prices for swiss on the different periods and then the inflation was calculated by the change of values in the index for every period.

Taken this on account note that inflation is a percentual change of a wide selected prices or quantities change depending on the methodology.

So the inflation shown in your data comes from a change on index, the base index from wich the changes will be calculated generally has to be a period of realtive economic estability.

In this case we'll assume the base period as year 2000 because is the starting period of your data. The Index for base period will be 100.

Year 2000
Inflation .98%
Index 100

From there we will calculate the value of the other indexes.

To do this we aply the aritmethic formula

(%Inflation+1)*(Prior year index)

For example

2001 Index will be = (1+.0266)*(100) = 102.66

2002 Index will be = (1+.0206)*(102.66) = 104.77

2003 Index will be = (1+.0127)*(104.77) = 106.11

The running totals are :

Having the index values then we can take the price of a commoditie or a service we want to take inflation on by account. The price with inflation is called "Nominal Price" and the one without inflation is "Real Price To do this we employ the arithmetic formula:

(Nominal Price for Selected Year)*((Index of year selected)/(Index of base year))

For 2000 Real Price = (81.21)*(100/100) = 81.21

For 2001 Real Price = (89.9)*(102.66/100) = 92.29

For 2002 Real Price = (96.54)*(104.77/100) = 101.15

The Running Totals would be

I hope the explanation was not that technical or that thedious, we can enter in more detail or less detail but i guess this would be right.

You can apply the same methodology for montly or quarterly basis

Now you can see than given the general level of prices on swiss economy 2012 was the Peak year on real prices for the selected period.

But 'ill add that given that we live on a world economy and the price of gold is fixed by international exchanges betweeen coutries a theoritical calculation of the real price involves currency exchanges and more theory.