Inflation Rate = End CPI – Original CPI / Original CPI

Question 1

You’re working on story about meal costs for a “Welcome back, students” edition of the Metroville University campus newspaper. You learn that incoming freshmen at will pay $1,233 for an unlimited campus meal plan. Four years ago, incoming freshmen paid $987 for an unlimited meal plan. Using the percent change formula you learned about in Chapter 2, you figure out that the cost of an unlimited meal plan has risen 25 percent over the past four years. What is the inflation rate for the same period, assuming that the CPI went from 196.4 to 219.1 during the same four-year period?

Inflation Rate = 219. 1 – 196.4 / 196.4

Inflation Rate = 22.7 / 196.4

Inflation Rate = .11558

*12 percent

Question 2

A year ago, the city signed a two-year contract hiring a local garage to perform scheduled maintenance on the city’s fleet of police patrol cars. A provision in the contract stipulated that the garage would receive $19,339 from the city for the first year, and the garage’s pay for the second year would be adjusted upward to match any increase in inflation. The city’s finance director is scheduled to inform the City Council about the new contract amount during tonight’s meeting. A source tells you that the mayor might try to inflate the new figure a bit to pay back a political favor. If the CPI was 208.4 last year and now stands at 218.8, what would you expect the new contract amount to be?

Inflation Rate = 218.8 - 208.4 /208.4

Inflation Rate = 10.4 /208.4

Inflation Rate = .0499

Cost Increase = .0499 X 19,339

Cost Increase = 965.09

Total Cost = 19,339 + 965

Total Cost = 20,304

*$20,304

Question 3

The state Legislature is debating whether to raise the state’s minimum wage. Opponents point out that the minimum wage has risen steadily over the past several decades. In 1976, for example, minimum wage was only $2.20 an hour. Now, it’s $7.25 an hour. Supporters, though, say the increase has not kept up with inflation. Assuming that the CPI in 1976 was 56.9, and that the present CPI is 215.3, what would the present minimum wage be if it had kept pace with inflation?

Inflation Rate = 215.3 - 56.9 / 56.9

Inflation Rate = 158.4 / 56.9

Inflation Rate = 2.784

New Minimum Wage = 2.784 X 2.20 +2.20

New Minimum Wage = 6.12 +2.20

New Minimum Wage = 8.32

*$8.32