If the amount that $1000 will purchase is only $930 after 2 years, what was the average inflation rate?

Inflation problem require the following discussion. Inflation is a term used to describe the erosion of the purchasing power of money. For example, if the annual inflation rate is 3%, then $1000 worth of purchasing power now will have only $970 worth of purchasing power in 1 year because 3% of the original $1000 (0.03 × 1000 = 30) has been eroded due to inflation. In general, if the rate of inflation averages r per annum over n years, the amount A that $P will purchase after n years is

A = P ∙ (1 - r)ⁿ

where r is expressed as a decimal.