If the CPI one year ago was 135.3 and today it is 130.6, what has been the rate of deflation over the past year?

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Prepare for the Qualified Financial Adviser Exam 2 with flashcards and multiple choice questions, complete with hints and explanations. Get exam-ready and increase your confidence with our comprehensive study materials!

Multiple Choice

If the CPI one year ago was 135.3 and today it is 130.6, what has been the rate of deflation over the past year?

Explanation:
Deflation rate is the percentage change in the overall price level over the year. The CPI fell from 135.3 to 130.6, a drop of 4.7 points. Compute the rate as 4.7 divided by 135.3, giving 0.0347, i.e., about 3.47% decline. Rounded, this is 3.5% deflation. The other numbers don’t match because they correspond to different relative drops: 3.2% would require a slightly smaller decline, 3.7% a slightly larger one, and 4.7% would imply a much larger drop relative to the starting index.

Deflation rate is the percentage change in the overall price level over the year. The CPI fell from 135.3 to 130.6, a drop of 4.7 points. Compute the rate as 4.7 divided by 135.3, giving 0.0347, i.e., about 3.47% decline. Rounded, this is 3.5% deflation. The other numbers don’t match because they correspond to different relative drops: 3.2% would require a slightly smaller decline, 3.7% a slightly larger one, and 4.7% would imply a much larger drop relative to the starting index.

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