Re: Inflation Calculator

From: Rich Carreiro <rlcarr@animato.arlington.ma.us>
Subject: Re: Inflation Calculator
Date: Mon, 24 Jan 2000 16:52:30 -0500

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>>First, how do you plan to use a table of past inflation data when
>>going forward?  You can't just "replay" past inflation series.

^^^
You need to answer this question (not to me, but internally as a
program design issue)

>>
>> >       Y =  X * (1 - C)
>>
>>It would be
>>         Y = X / (1 + C)
>
>Okay, so given $1000 to start and an inflation rate of 2%, my formula gives 
>$980 and yours gives $980.39. So I can see how over many years the errors 
>would chain up.
>I don't understand why your formula is better though I believe you that it 
>is.

It is better because it is correct :-) (sorry to be glib).  Inflation
is an increase in prices, not a decrease in dollars you have.  If
inflation is 5%, something that costs $1 today will cost $1.05 next
year.  That is subtly different than saying that if I have $1 today
and inflation is 5%, I will have $0.95 next year.

So if I have $1000 today, I can buy 1000 units of something that costs
$1.  At 5% inflation, that thing will cost $1.05 next year.  With the
same $1000 a year from now, I can only buy $1000/$1.05 = 1000*(1/1.05)
units of that thing.  Thus $1000 a year from now is only worth $1/1.05
today given 5% inflation.

So, if inflation is running at 5%, that means that $1.05 a year from
now is worth $1 today, because if prices increased 5% over the course
of a year, it takes $1.05 to buy the same amount of things that $1
buys today.  This is the definition of inflation.

And if $1.05 next year is $1 today, then $1 next year is $1/1.05 today.
By proportions:
        $1     $1.05
       ---- = -------
         x      $1

 1.05 x = 1
      x = 1/1.05

And that is what "my" formula does.

Rich Carreiro                            rlcarr@animato.arlington.ma.us

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