How to calculate an inflation rate using GDP deflator

Written by sam n. austin
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Inflation is the rise in price over time for a particular product or service. The most common way to calculate inflation is to calculate the percentage change in the CPI, or Consumer Price Index, from one year to the next for a given country. However, you can also calculate the inflation rate using the GDP deflator. The GDP deflator is a figure you calculate by dividing a country's nominal GDP in a given year by its real GDP. Both GDP figures are reported by the governmental body that analyses a country's economic affairs. In the United States, the figures are reported by the Bureau of Economic Analysis in the U.S. Department of Commerce.

Skill level:
Easy

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Instructions

  1. 1

    Select the time span for which you want to calculate a country's inflation rate. For example, you might want to know the inflation rate from 2005 to 2006.

  2. 2

    Note the value for the GDP in the earlier year and for the GDP deflator in the later year as reported by the country's governmental economic affairs body. For example, country A's GDP in 2005 might be reported as £65 million and the GDP deflator value in 2006 as £61 million.

  3. 3

    Enter the values in the GDP deflator inflation calculation formula. The formula is: Earlier year's GDP value divided by later year's GDP deflator value minus one equals the inflation rate in per cent between the two years.

  4. 4

    Perform the calculation. In this example, £65 million in 2005 divided by £61 million in 2006 minus one equals an inflation rate of 5 per cent between 2005 and 2006.

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