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# Inflation Forecast

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Please help with the following problem regarding international finance. Provide step by step calculations in the solution.

On August 1st 2009, the USD/SAR exchange rate was SAR9.20 per USD. On August 1st 2010 (1 year later), the USD/SAR rate moved up to USD/SAR9.80. During this period, one year nominal risk free interest rate in the US was 3.5% per annum (per year). The real interest rate in the US was 1.5%. On August 1st, 2010, economists shared the consensus view that the USD/SAR rate was at Purchasing Power Parity equilibrium. Provided that IFE holds, what would be the best forecast of South African inflation between August 2009 and 2010?

A. 8.62
B. 2.90
C. 8.06
D. 10.25

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This in-depth solution explains the computation of inflation forecast with step-by-step explanations and workings shown.

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Problem:
On August 1st 2009, the USD/SAR exchange rate was SAR9.20 per USD. On August 1st 2010 (1 year later), the USD/SAR rate moved up to USD/SAR9.80. During this period, one year nominal risk free interest rate in the US was 3.5% per annum (per year). The real interest rate in the US was 1.5%. On August ...

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###### Education
• MCom, Annamalai University
• IATA, International Air Transport Association
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