Abstract: A time varying inventory model for deteriorating items with allowable shortages is developed in this study. The inflation rates (internal and external) are time-dependent and demand rate is inflation-proportional. The inventory level is described by differential equations over the time horizon and present value method is used. The numerical example is given to explain the results. Some particular cases, which follow the main problem, will discuss and the results will compare with the main model by using the numerical examples. It has been achieved which shortages increases considerably in comparison with the case of without variable inflationary conditions.