Inflation (Grade 12 NSC Matric Mathematical Literacy): Revision Notes

Inflation

What is inflation?

Inflation refers to the general increase in prices of goods and services over a specific period of time. When inflation occurs, the same amount of money buys fewer goods and services than it did before. The inflation rate shows this price increase as a percentage.

Understanding inflation is crucial for making financial decisions and budgeting for future expenses. It affects everything from the cost of basic groceries to major purchases like cars and houses.

Key inflation formulas

There are three main types of inflation calculations you need to master. Each formula serves a specific purpose depending on what information you have and what you need to find.

1. Calculating future prices (forwards calculation)

When you know the current price and inflation rate, and need to find the future price:

$\text{New price} = \text{Current price} + (\text{Inflation rate} \times \text{Current price})$

Or more simply: $\text{New price} = \text{Current price} \times (1 + \text{Inflation rate as decimal})$

2. Calculating previous prices (backwards calculation)

When you know the current price and inflation rate, but need to find what the price was before:

$\text{Previous price} = \frac{\text{Current price}}{1 + \text{Inflation rate as decimal}}$

3. Calculating the inflation rate

When you know both the previous and current prices:

$\text{Inflation rate} = \frac{\text{Current price} - \text{Previous price}}{\text{Previous price}} \times 100$

4. Compound inflation formula

For calculations over multiple years:

$A = P(1 + i)^n$

Where:

• A = projected cost
• P = current cost
• i = annual inflation rate (as decimal)
• n = number of years

Worked examples

Exam tips and common traps

Successfully solving inflation problems requires a systematic approach and awareness of common pitfalls that can cost you valuable marks.