How to Calculate Escalation
25 JUN 2018
Remember when a bottle of Coca-Cola only cost a nickel? Probably not—but you may have heard people reminisce about “the good old days” when a cold, carbonated beverage set you back a mere 5 cents. This increase in price is cost escalation, and by tapping into simple math, you can calculate cost escalation yourself.
1 What is Cost Escalation?
Escalation is the change in the price of goods or services over time within the same economy. In the field of economics, cost escalation is similar to the more common term inflation. Both of these concepts address the way prices tend to increase over time. However, unlike inflation, escalation refers to a single item or class of items. Generally, cost escalation reflects increases in costs associated with labor, supplies, regulatory changes and trends within the market.
2 Calculating the Rate of Escalation
To calculate the rate of escalation for an item, you must first locate the initial price and the current price and find the difference between the two prices. Then, divide that difference by the initial price and multiply by 100 to find the rate of escalation expressed as a percentage.
For a simple example of this math in action, consider a sandwich that cost $4.50 last year but now carries a price tag of $5. When you divide the difference (50 cents) by the initial price ($4.50) and multiply by 100, you find an escalation rate of 11 percent.
The escalation rate jumps substantially when the change in price is larger. For that bottle of Coca-Cola, the initial price is 5 cents, while the current price is approximately one dollar, leaving a difference of 95 cents. When you divide this difference (95 cents) by the initial price (5 cents) and multiply by 100, you calculate an escalation rate of 190 percent!
3 Projecting Future Escalation
Understanding how to calculate cost escalation can also help you project how much the price of an item might increase in the future, assuming the rate of escalation stays the same. To do this, simply multiply the current price by the rate of escalation and add this value to the current price.
Using this method, that sandwich will cost $5.55 next year, assuming a steady rate of escalation. Even more shocking, if the price of Coca-Cola were to increase as steeply as it did during the previous century, in 2100, that cold, carbonated beverage would set you back $2.90.