Inflation Pass Through recently, through

leadcfa

I recently found out that there are two formulas for inflation pass through.

When do you use (1/(r+((1-pass through)*infl)) and when do you use the other formula?

dvilayphet

which is the other formula

jcole21

What's the other formula? I only recognize the one you gave for calculating inflation flow through.

RMontgomery

the one on the mock had it r-inflation + (1-pass thru)*inflation

and it had me stumped because the formula u used didn't get me the right answer. I think it was the last question on the PM

Howd

ZeroBonus Wrote:
-------------------------------------------------------
> the one on the mock had it r-inflation + (1-pass
> thru)*inflation
>
> and it had me stumped because the formula u used
> didn't get me the right answer. I think it was the
> last question on the PM


the original formula is for real rate, this one just subtracts inflation from nominal rate to get the real rate.

malbec

Sorry for the confusion. I guess there is only one formula.

So if I am given r in real terms i just do 1/(r+(1-pass through)*infl))

If given in nominal terms 1/((r-i)+(1-pass through)*infl))

Is that right?

mar350

you got it

dyga

Chuckrox8 Wrote:
-------------------------------------------------------
> Sorry for the confusion. I guess there is only
> one formula.
>
> So if I am given r in real terms i just do
> 1/(r+(1-pass through)*infl))
>
> If given in nominal terms 1/((r-i)+(1-pass
> through)*infl))
>
> Is that right?


i guess..

wilslm

Yes, that's correct.

I found the mock question which Zero mentioned, it's question 60 on the 2011 AM mock. In this question they provide the nominal rate of return, so we needed to subtract inflation to get the real rate (as you've shown above).

Cheers

former

Check out ?'s 13 & 14 of reading 38, it's the same formula, but they specify real vs nominal rates for each question. Formula calls for real rate of return to be used, so if they give nominal we have to adjust for inflation. And per mock it looks we should assume nominal unless stated otherwise.



Edited 1 time(s). Last edit at Friday, June 3, 2011 at 06:10PM by jgrandits.