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For example, 100 dollars is going to be worth less in 30 years, how much less depends on the inflation rate. if we assume a constant annual inflation rate of 3%, should I compound the inflation rate daily or monthly or yearly? I'm debating mostly between daily and monthly, since the data of inflation rate is collected on monthly basis. But isn't it happening in real life on a daily basis?? Can someone help me to answer this question and please provide some explanation is possible

Thank you!

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Inflation is the percent change in a price index per unit time. You should compound at the same frequency as the units in the inflation measure. Many reported measures of inflation are year over year measures, which means that even though they may be reported monthly or quarterly they overlap substantially between observations. You want to be sure to handle this properly by choosing non-overlapping intervals.

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If you are estimating annual inflation figures, it makes sense to compound them annually.

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  • $\begingroup$ This answer would benefit from an economic or data based argument for the answer it advances. $\endgroup$ – BKay Feb 27 '15 at 16:07

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