IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation
A consumer price index (base year 100) stood at 150 at the end of Year 1 and 162 at the end of Year 2. What was the rate of inflation over Year 2?
Inflation over Year 2 was 8.0%. It is the change in the index divided by the starting index: (162 minus 150) divided by 150. Using the point change alone or dividing by the later index would give incorrect figures.
- A12.0%
- B7.4%
- C8.0%Correct
- D6.2%
- 10.8%
Explanation
Inflation = (162 - 150) / 150 = 12/150 = 8.0%. Using the difference of 12 index points as a percentage gives 12.0%, which ignores the base. Dividing by the new index (12/162) gives 7.4%, which uses the wrong base.
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