IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Allowing for inflation
The Consumer Price Index for a city was 150.0 at the start of 2023 and 159.0 at the start of 2024. What was the annual rate of inflation over 2023?
The annual inflation rate is 6.00%. It is the proportional change in the index, 159 divided by 150 minus one. Dividing the rise by the later index value, or quoting the raw 9 point rise, uses the wrong base and gives incorrect results.
- A5.00%
- B6.00%Correct
- C9.00%
- D5.66%
- 6.38%
Explanation
Inflation = 159.0/150.0 - 1 = 0.06, i.e. 6.00%. Using the difference in index points (9) as a percentage gives 9.00%, which ignores the base. Dividing by the later index (9/159) gives 5.66%, which uses the wrong base.
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