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I've been unable to find a concrete answer to this question so I assume I am overlooking something incredibly simple.

In order to determine the real interest rate, I am required to use the nominal and inflation rates (using the nominal divided by inflation equation). Whilst the nominal rate is given (7.6% compounded monthly), the inflation rate is only given in terms of bimonthly cpi growth rates (1.32%, 1.75%, 1.64% and so on).

Presuming the equation requires the inflation rate to be annual, how would I determine this? Simply adding all six growth rates together or using the first and last given growth rates?

Any direction to how to approach this would be much appreciated. Thank you! Douglas

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CPI is an Index.

If an index started with 100 on Jan 1, and the "bimonthly cpi growth rate" is 1.32%, the index becomes 101.32 on Feb 28.

If an index is 101.32 on Feb 28, and the subsequent "bimonthly cpi growth rate" is 1.75%, the index becomes 101.32 x (1 + 0.0175) = 103.0931 on April 30.

Fast forward, the CPI growth aka Inflation over the year is simply

((Index_Dec_31 / Index_Jan_1) - 1).

So Inflation is ((1 + 1.32%) x (1 + 1.75%) x (1 + 1.64%) x ... x ... x ... ) - 1

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  • If what you want to know is the rate of growth over some specified period, just take the index at the end of that period divided by the index at the beginning of the period. You don't have to multiply together all the monthly increases, though that should give the same result. – Jay Aug 31 '15 at 14:15

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