I was cleaning out my email inbox and found this email from way back in July:
I have a question. If a person owed money to someone in 1998, but did not repay that amount until 2010, how can he calculate what amount to return now (in 2010) considering that much inflation has taken place since 1998? Should he use the yearly CPI inflation rate for his country? Will appreciate your help. Thanks.
The amount to be paid back and the term of the loan should have been spelled out when the money was initially borrowed. Although the CPI can be used, it should be the beginning point. The person who loaned the money was out that money for the last 12 years. Paying back money with only an adjustment for the CPI is basically paying them back the original amount. To compensate them for the usage of the money, the borrower would need to include some percentage above the rate of inflation (the CPI in this case). I would say a good starting point is 2% over the CPI.
Basically, what that means is if this person borrowed $1,000 back in 1998, they should pay back around $1,726.93 at CPI +2% (or $1,351.59 just using the CPI for the last 12 years).