Step 1: Select Some Items

Think of a few items you purchase regularly.

Enter these into the table using the input bar.

Step 2: Assign prices for each of the items on your list.

How much does each cost?

Step 3: Assign weights.

What percentage of spending do you devote to this item? Note that the weights should add up to a number that is easy to work with, such as 1.0, 10, 100 or 1000.

Step 4: Price Changes

In year 2 the prices of the goods have changed by some random value.

You now have all the information you need to calculate a single figure that can be used to represent the average price change of all of these goods.

Challenge: See if you can find a method to come up with this number.

Step 5: Year 1 Price Index

The first step is to create a price index for Year 1. This will be your base year.

Because it is the base year, it makes sense to set all values equal to 100. This will make it easy to compare against prices in future years.

Step 6: Year 2 Price Index

The next step is to create a price index for Year 2.

Numbers in this column will be in the same proportion to 100 (our base year) as the price of our item in Year 2 to its price in Year 1.

Formula: Year 2 Price Index = (Price Year 2 / Price Year 1) x 100

Step 7: Year 2 Weighted Index (CPI)

We now want to create a Year 2 Weighted Index. This is a Consumer Price Index.

Formula: Year 2 Weighted Index = Weight x Year 2 Price Index

This figure weights the price changes relative to how much of your income gets spent on each item.

Items with a greater weight have a greater value because you spend more of your money on the item.

Step 8: Sum of Weighted Values

Each item in the Weighted Index shows how much that item’s price change will change the price of our basket of goods.

To find out the total price change in the basket of goods we can add these figures together.

Step 9: Divide by Sum of Weights

Our final step is to come up with a price index which is comparable to the price index in our base year.

The sum of the weighted index is a good place to start. But it has been inflated due to the value of the weights.

To adjust for this, divide the sum of the weighted index by the sum of the weights.

This will give us a price index against which we can compare our base year price index, giving us a single inflation figure.

Step 10: Compare against Year 1 Price Index

Congratulations! You have successfully calculated inflation between two years using a Consumer Price Index (CPI).

Our CPI in Year 1 is 100. This is because this is our base year.

Our CPI in Year 2 is / = .

The percentage change between these two figures is %.

This percentage change is the inflation figure.

You could use this method to find the inflation rate between any two years (not just the base year).