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From: petrbk (Rep: 0)Date: 07/14/2016 11:25
Forum: Gurus Answer Questions - Msg #548Thread #673853554 (Rec: 0)
How do I calculate impact of the inflation?
Hi all,
I have a couple of questions regarding calculating inflation. I have read a several articles but I’m still a little bit confused. Maybe I need some specific examples to resolve current problem and to be able correctly explain where my confusion is coming from. Can you please help?

1) At the beginning I would like to calculate what is the value of $1000 in the next year (resp. next 3 years) with average annual inflation being 2%.
1.1) My approach was: $1,000*0.98 = $980 (and for 3 years: $1,000*0.98 *0.98 *0.98 =$941.19)
1.2) But according to financial math the correct approach is: $1,000/(2/100+1)=$980.39 (and for 3 years: $1,000/((2/100+1) *(2/100+1) *(2/100+1)) =$942.32
Can anyone pls explain the interpretation of each? why is it more accurate to use financial mathematical approach then the simplistic common sense approach ($980)? What do the two results actually show?
Why is it that when I lose during a year thanks inflation 2% of my $1,000 the result is $980.39? and not 2% of $1000 is $20?! :-)

2) If I want to calculate total inflation for 3 years when I know that annual inflation was 2%, may I use geometric mean: (((-2/100)+1) *((-2/100)+1) *((-2/100)+1))-1)*100=((0.98*0.98*0.98)-1)*100=6.12%

3) What is right approach when I want to subtract inflation from revenues that are presented in percentages? Average annual inflation is 2% and total revenues for 3 years 30%.
May I also use geometric mean: ((30/100)+1)*((-6.12/100))-1)*100=((1.3*0.9388)-1)*100= final revenue after subtracting inflation is 22.04%

4) At the end one small point just to be sure. How much will I pay for example for a laptop in 3 year when its price is $1,000 today and average annual inflation is 2%: $1,000*1.02 *1.02*1.02=$1061.21 Is this correct?

Many thanks

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