Inflation calculation
Hi, everyone. I'd like to ask you a question concerning the calculation of inflation.
Assume I have a company with 3 segments
The segment growth rates in real terms: Segment 1, 2.7% Segment 2, 6.0% Segment 3, 14.5%
If the size of the segments is equal, the company should grow by 2.7% + 6.0% + 14.5% = 23.2% in real terms.
If inflation is 2.5%, I'd calculate nominal growth as 1.232 * 1.025 = 1.2628 -> 26.28% which is the necessary growth rate to offset inflation.
However, if I use another approach and adjust for inflation on a segment level I get a different result.
Segment growth rates in nominal terms: Segment 1, (1+2.7%)(1+2.5%) -1 = 5.267% Segment 2, (1+6.0%)(1+2.5%) -1 = 8.65% Segment 3, (1+14.5%)*(1+2.5%) -1 = 17.362%
Which adds up to 31.279%.
So which is the correct nominal growth rate, 26.28% or 31.279%?
Could anyone of you tell me which approach I should use to account for inflation properly? Thanks a lot.
You have to take the average of the segment growth rates to get the company growth rate.
23.2% / 3 = 7.73%, (1+7.73%)*(1+2.5%) - 1 = 10.43% 31.28% / 3 = 10.43%
Quidem dolorem eum vero quos et alias quis. Autem dolores qui dolorem sit reiciendis tenetur minus. Optio consequatur placeat nam sed nobis corrupti doloremque aliquam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...