How to Calculate Future Cost of Goods Using Inflation Rates

by Cynthia Myers

Knowing how much goods you regularly use in your business will cost in the future, from raw materials for manufacturing to items for resale, can help you predict future expenses, set prices and predict profits. Inflation rates – the rate at which prices rise – can help you predict future costs, though rates of inflation can vary from year to year. Studying past inflation rates can help you predict future increases and more accurately compute your future costs.

Review your current costs. This will be your starting point for predicting future costs, so you want to use the most accurate figures available.

Determine the rate of inflation. One of the most popular ways to do this is to consult the Consumer Price Index (CPI). The United States Department of Labor looks at a “market basket” of goods and tracks how much the price of these goods changes each month. The Bureau of Labor Statistics publishes the Consumer Price Index monthly and annually. By consulting the CPI, you can see the rate of inflation for the past month, year, or number of years. You can further refine your calculations by noting the rate of inflation for the particular sector into which your goods fall. The CPI notes the percentage price increase for categories such as food, new and used automobiles and medical care, as well as an overall rate of inflation for all goods. If you want to know how much a new car will cost in five years, use the CPI figures for new automobiles.

Multiply your current cost for a particular good by the annual rate of inflation. This tells you how much the price will increase in one year. For 2011, the average CPI was 2.9, so you’d multiply your cost by 2.9 percent. If your goods cost $100,000 this year, they will cost $102,900 next year.

Multiply the result of the calculation you made in Step 3 by the number of years into the future you want to predict. If you want to know the cost of your item in five years, multiply by five. The result is a prediction of what your goods will cost in five years. Following the example in Step 3, the cost of your goods in five years would be $115,366.

Tip

  • You can also use an online inflation calculator to help you. These calculators usually use a set inflation rate of 3 percent, as this is the average inflation rate in the United States over time. To use the calculator, plug in your current costs and the number of years into the future you’d like to predict and hit "Enter."

Warning

  • The amount you calculate will be an estimate only, because no one can foresee the exact amount a particular item will increase in price. A 1996 economic study concluded that the CPI overstates inflation rates by as much as 1 to 2 percentage points a year.

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