IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Allowing for inflation
The price index for a basket of goods was 240 at the start of 2022 and 264 at the start of 2023. What was the annual rate of inflation over 2022?
The annual inflation rate is 10.00%. It is the change in the index divided by the starting value, (264 - 240)/240. Dividing by the later index of 264 would wrongly give 9.09%.
- A8.00%
- B9.09%
- C10.00%Correct
- D12.00%
- 24.00%
Explanation
Inflation = (264 - 240)/240 = 24/240 = 0.10, which is 10.00%. Using 264 as the base gives 9.09%, which is wrong because the rate is measured relative to the earlier index value.
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