There are two measures of inflation in India:

- Customer Price Index (CPI) indicates an increase in retail-level prices.
- Wholesale Price Index (WPI) refers to price elevation on the wholesale level.

Inflation can be calculated using the CPI.

CPI = (Cost of Fixed Basket of Goods and Services in Current Year/ Cost of Fixed Basket of Goods and Services in Base Year) *100

The rate of inflation can be calculated using CPI data for the two time periods you want to compare (usually a year apart).

Inflation = ((CPI x+1 – CPIx)/ CPIx))*100

Where,

CPI_x Is the Consumer Price Index for a specific period in the past.

CPI_x+1 represents the Consumer Price Index for the time period you want to compare to the past

Now, in order to calculate the future cost given the rate of inflation and current value, VNN Wealth’s inflation calculator uses the following formula-

Future Cost = Current Value * (1 + Inflation Rate) ^ Number of Years

Let’s say you are paying INR. 60 for a 1L carton of milk. After 5 years with 6% inflation, you’ll have to pay ~ INR. 80.

Future cost = 60*(1+0.06)^5 = 80.2