The price index in the year 1993 is 60.

The base at 2012 is 100.

The annual nominal interest rate between 1993 and 2012 is 66% on average.

What is the average annual inflation between 1993 and 2012?

I know that

Inflation = $\frac{X_{t+s}-X_t}{X_t}$x$ 100$

where $X_{t+s}$ is the current year and $X_t$ is the year being compared.

However, when I use this formula with $X_{t+s}=100$ (since it is the base of the index) and $X_t=60$, I just get the annual nominal interest rate of 66.6666%.

What did I do wrong here?


1 Answer 1


The calculation goes like:

Price index @ 1993 = 60 $ \Rightarrow X_{t+s}=0.6 $

Price index @ 2012 = 100 $ \Rightarrow X_{t}=1$

Number of years from 1993 to 2012: $ 2012 -1993 = 19 \Rightarrow s=19$

$100*((\frac{X_{t+s}}{X_t})^{(\frac{1}{s})}-1) = 100*(\frac{1}{0.6} ^{(1/19)}-1)=100*(\sqrt[19]{(5/3)}-1)=2.72502$

  • $\begingroup$ You may want to add that you use the geometric average here, because the price levels is obtained by compounding of the inflation rates over time. $\endgroup$
    – BrsG
    Sep 8, 2021 at 11:19

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.