Inflation is the rise in the general price level in an economy. When prices rise on average over a certain period, we speak of inflation. Inflation means that money becomes less valuable: with the same amount, you can buy less than before.
Inflation is usually measured as a percentage change in a price index, usually the consumer price index (CPI). The CPI measures the average price changes of a basket of consumer goods and services, including food, energy, rent, medical care, clothing, electronics, etc.
Inflation can be calculated by taking the percentage change in the CPI between two periods. The formula for calculating inflation is:
Inflation rate = ((CPI in the current year - CPI in the base year) / CPI in the base year) * 100
For example, if the CPI in the base year was 100 and the CPI in the current year is 105, then the inflation is:
Inflation rate = ((105 - 100) / 100) * 100 = 5%
Inflation also has an impact on the value of money over time. For example, if you want to know how much an amount of 100 euros from the past would be worth today, you need to calculate and apply the inflation over that period to that amount.
Suppose the inflation rate was an average of 2% per year. The amount of 100 euros from the past would be worth the following today:
Amount now = Amount then * (1 + inflation rate/100) ^ number of years
So if it was 5 years ago, then the amount now is:
Amount now = 100 * (1 + 2/100) ^ 5 = 110.41 euros
This means that 100 euros from 5 years ago would now be worth 110.41 euros, taking into account an inflation of 2% per year.
The above calculations are simplified for clarity and in practice, there may be other factors that need to be taken into account when calculating inflation and its impact on the value of money.