Equilon FXLower inflation.
Higher prices?
Start an index at 100. Choose two annual inflation rates and follow the price level through time.
Inflation slowed from 8% to 2%. Prices still rose in the second year.
Each year starts from the previous level
The calculation is 100 × (1 + first-year rate) × (1 + second-year rate). The second rate applies to the level reached at the end of year one. The rates are not simply added.
Three useful distinctions
A lower positive rate means the price level is rising more slowly. A zero rate leaves the level unchanged during that year. A negative rate reduces it. The second-year result can still remain above the original starting level even after a year of falling prices.
This is a single hypothetical index with annual changes, not a forecast, household budget or reproduction of CPI or PCE. The vertical scale is labelled from 85 to 135 to make the changes visible. Read the full introduction to inflation and price levels.