Price Index vs Inflation Rate: Use the Right Ratio

Index levels are the conversion inputs

If a compatible index changes from 100 to 125, the original basket costs 25% more. An original 200 monetary units becomes 250 at the later index. The calculation is amount × end index ÷ start index; the arbitrary base cancels when both observations use a compatible series.

Inflation and lost buying power are different percentages

With a price factor of 1.25, unchanged cash buys 1/1.25=80% of the original basket: a 20% buying-power reduction. A 25% price increase and 20% loss of buying power describe the same change with different denominators.

A rate is not an index

A 12-month inflation rate describes a relative change from one month to the same month a year earlier. It does not provide the price-index level itself. Adding several annual percentages does not reproduce compounding, and joining unrelated national index levels does not give an exchange rate.

Check a worked example

Enter 100 at a 2% assumed annual rate for 10 years in the purchasing-power scenario. Future basket cost is 121.90; unchanged 100 has 82.03 of initial purchasing power. This is an invented assumption, not an observed inflation forecast.