How is inflation calculated using CPI?

The calculation of inflation using the Consumer Price Index (CPI) is typically measured by comparing the change in CPI between two distinct time periods. The formula you've identified accurately depicts this process. By taking the difference between the CPI of the current period and the CPI of the previous period, and then dividing it by the CPI of the previous period, you can gauge how much prices have increased or decreased as a percentage.

The multiplication by 100 at the end of the formula converts this relative change into a percentage, providing a clear and understandable representation of inflation over the specified time frame. This method effectively illustrates the rate at which the average price level of a basket of goods and services consumed by households has changed, which is central to understanding economic conditions.

The other options do not appropriately represent inflation calculation principles. For instance, the second option suggests a reversal in the order of subtraction and division, which would yield a negative result if prices are rising, thus misleading the interpretation. The third and fourth options inappropriately combine CPIs without providing a contextual relationship regarding time periods, which is critical for measuring inflation accurately.