Definition:
A percentage point (pp) is a unit of measurement used to express the difference between two percentages. It is often used to clarify changes in values or rates, such as interest rates or economic data. For example, if an interest rate increases from 5% to 6%, the increase is said to be 1 percentage point (1 pp), not 1 percent.

How percentage points work

When discussing percentage changes, it’s important to distinguish between a percentage change and a percentage point change:

• Percentage change refers to the relative change between two values, expressed as a percentage of the original value.
• Percentage point change measures the absolute difference between two percentages, regardless of their original values.

For example, if an interest rate rises from 4% to 6%, the increase is 2 percentage points, but the percentage change is 50% (calculated by dividing the difference by the original rate).

When are percentage points used?

Percentage points are commonly used in various financial and economic contexts, including:

• Interest rates: When central banks or lenders change interest rates, the change is often expressed in percentage points. For example, “The Bank of Canada raised rates by 0.25 percentage points.”
• Inflation rates: Changes in inflation are often discussed in percentage points to highlight shifts in economic conditions. For example, “Inflation increased by 2 percentage points last year.”
• Economic growth: GDP growth or unemployment rates can also be expressed in percentage points to indicate changes over time.

Why percentage points are important

Using percentage points helps provide clear and precise information, especially when discussing financial matters. Here’s why they matter:

• Clarity: They remove any ambiguity that might arise from discussing changes in relative terms (percent changes) and allow for more straightforward comparisons.
• Accuracy: Using percentage points avoids confusion when the base numbers being compared are large or small, ensuring that changes are clearly communicated.
• Standardization: Percentage points provide a standardized way to measure changes in various economic indicators, making it easier to compare data over time or across different regions.

Difference between percentage and percentage points

It’s easy to confuse percentage changes with percentage points, but they measure different things:

• A percentage point is the difference between two percentages. If an interest rate moves from 3% to 5%, it has increased by 2 percentage points.
• A percentage change refers to the relative difference in the value. In this example, the percentage change is 66.67% (the difference of 2% divided by the original 3%).

Understanding this difference is crucial when interpreting economic reports or financial news.

Examples of percentage points in everyday use

• Interest rates: If a bank’s mortgage rate goes from 3.5% to 4.5%, the increase is 1 percentage point.
• Inflation: If inflation rises from 2% to 4%, it has increased by 2 percentage points.
• Loan fees: If a lender changes its loan fees from 5% to 7%, the increase is 2 percentage points.

Conclusion

Percentage points are a clear and effective way to measure and communicate changes in percentages, especially in the financial and economic sectors. By understanding the difference between percentage changes and percentage points, you can better interpret data and make informed decisions about rates, inflation, or other economic indicators.

Last modified: November 11, 2024