How Do I Calculate Inflation Rate Using GDP Deflator?

To calculate the inflation rate using the GDP deflator, you need to follow these steps:

1. Determine Nominal GDP and Real GDP: Start by finding the nominal GDP, which is the total economic output without adjustment for inflation, and the real GDP, which is adjusted for inflation.
2. Calculate the GDP Deflator: The GDP deflator can be calculated using the formula:
   

   GDP Deflator = (Nominal GDP / Real GDP) × 100

   This gives you a measure of the price level relative to a base year.

3. Find the Previous Year’s GDP Deflator: To calculate the annual inflation rate, you also need the GDP deflator from the previous year.
4. Calculate the Inflation Rate: The inflation rate can be found using the formula:
   

   Inflation Rate = ((Current Year GDP Deflator – Previous Year GDP Deflator) / Previous Year GDP Deflator) × 100

   This formula gives you the percentage increase in the price level from one year to the next, effectively showing how inflation has changed.

Example: If this year’s GDP deflator is 120 and last year’s was 115, the inflation rate would be calculated as follows:

Inflation Rate = ((120 – 115) / 115) × 100 = 4.35%

Thus, in this example, the inflation rate based on the GDP deflator would be 4.35%.