(a) The CPI was 163.0 for 1998 and 215.3 for 2008. Assuming that annual inflation remained constant for this time period, determine the average annual inflation rate.

(b) Using the inflation rate from part (a), in what year will the CPI reach 300?

Problem requires the following discussion. The Consumer Price Index (CPI) indicates the relative change in price over time for a fixed basket of goods and services. It is a cost of living index that helps measure the effect of inflation on the cost of goods and services. The CPI uses the base period 1982–1984 for comparison (the CPI for this period is 100). The CPI for January 2006 was 198.3. This means that $100 in the period 1982–1984 had the same purchasing power as $198.30 in January 2006. In general, if the rate of inflation averages r per annum over n years, then the CPI index after n years is

 

where CPI₀ is the CPI index at the beginning of the n-year period.

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CPI = CPI O 1 + 100