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Excel Model Using Real & Nominal Inflation Rates

Posted on 2010-08-24
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I have been asked to produce a model that shows both the 'real' and 'nominal'' rates of inflation.  I have looked on the internet but am still not quite sure how to show this in an Excel model.

Please would someone use the attached modell and show simplistically how this would be calculated.

I've inserted some assumed costs based on the 2009 basis year and provided some empty cells that could be used to show the nominal and real results.

Please feel free to attach you own model, but I would really appreciate someone showing the difference between the two and providing an good/basic explanation as to what the nominal and real results are showing, relative to the basis year used.

Thanks very much.
EE-Real---Nominal-Inflation.xls
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Question by:davidascott
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Expert Comment

by:Cluskitt
ID: 33509649
Would this help: http://economics.about.com/cs/macrohelp/a/nominal_vs_real.htm
Or is your question how to create the graphs?
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Author Comment

by:davidascott
ID: 33509967
No, I'm not trying to create graphs, just simply calculate the numbers
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Author Comment

by:davidascott
ID: 33509978
Funnily enough I looked at the same article, but maybe I'm just being thick!  Would you mind slotting this into the table that I attached to the question. Thx David
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Expert Comment

by:Dave
ID: 33510114
I have updated the model with a more typical cost sample

ie costs are flat real in 2009 terms, ie structurlyal the same over time

then the costs are inflated - by compounding the cpi - into nominal terms

if labour is $1000 flat real in 2009 terms then in 2010 after cpi of 3.5% it is
1000* 103.5% = 1035
in 2011 these costs compounded by the 2011 cpi ,ie
1035*103.7% = 1074  (ie 100 * 103.5%*103.7%)
etc

Cheers

Dave




Copy-of-EE-Real---Nominal-Inflat.xls
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Author Comment

by:davidascott
ID: 33512470
Dave,
Just to confirm:

Real Results = uplifted costs taking into account inflation - per your model using 2009 basis year
Nominal Results = actual costs without inflation

Is that the long and short of it in a nutshell?

Sorry to be so dense.
Best,
David
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Accepted Solution

by:
Dave earned 2000 total points
ID: 33516978
David,

Actually it's the other way :)

Real means without cpi - in the example I gave I kept costs flat real 2009 levels
Nominal means with cpi (ie inflated)

I have updated the exampe to make the year layout, and labelling clearer

Thats the vanilla example, where real numbers are escalated into nominal using cpi

It is also possible for costs to increase above cpi, ie increase in real costs plus inflation

An example is where labour is in short supply, real costs may increase over time (so total costs increase above the cpi rate)

I have added this example to the file

Cheers

Dave



Copy-of-EE-Real---Nominal-Inflat.xls
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Author Comment

by:davidascott
ID: 33529732
Dave,

Thanks for the reply.  I notice that the real % year on year uplift is 1%.  

What is the rationale behind this?  Are you suggesting in the model that you updated that in addition to inflationary pressures reflected by the nominal table of costs, there are also uplifts in costs that are not accounted for by inflation alone.

If this is the case, I think that I understand the points that you are making.  Please confirm.

Best, David
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Expert Comment

by:Dave
ID: 33530074
>   Are you suggesting in the model that you updated that in addition to  inflationary pressures reflected by the nominal table of costs, there  are also uplifts in costs that are not accounted for by inflation alone.

Exactly

1) Step 1 is what is the real trend over time, ie flat real costs, or perhaps real costs due to high demand, commodity prices have historically decreased in real terms over the longer term as technology made extraction of copper etc cheaper  (this is real escalation)
2) Step 2 is the conversion of real into nominal using cpi (escalation into nominal terms)

Cheers

Dave
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Author Comment

by:davidascott
ID: 33533092
Dave,

Your explantion is much simpler than the ones on the web and makes total sense.  You should update Wikipedia.

Explaining nominal and real uplifts from the viewpoint of bonds etc is not the easist thing if you're not in the financial services industry which is where the majority of such explanations come from.

Thanks for your responses, it was very helpful indeed.

Thanks again, David
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Author Closing Comment

by:davidascott
ID: 33533167
Simple answer and straight to the point
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