Finance
Inflation calculator
Inflation compounds exactly like interest, but in the wrong direction. Small annual rates become large over a working lifetime.
Both directions of the same calculation
Future purchasing power = amount ÷ (1 + r)n
These describe the same phenomenon from opposite ends. If a basket of goods costing $50,000 today costs $90,306 in twenty years at 3%, then $50,000 twenty years from now buys what $27,684 buys today. The first framing is useful for planning a future expense; the second for understanding what a projected balance is really worth.
Why 2% is the target
Most developed-economy central banks aim for around 2% annual inflation rather than zero. The reasoning is that a small positive rate provides a buffer against deflation, which is considerably harder to escape — when prices are expected to fall, households defer spending and firms defer investment, which reduces demand and pushes prices down further.
A low positive rate also allows real wages to adjust downward without nominal pay cuts, which employers find far easier to implement. The cost is a slow, permanent erosion of the value of cash.
Headline inflation is an average, not your rate
A consumer price index tracks a basket weighted to represent average consumption. Your personal inflation rate depends on what you actually buy. Someone with a fixed mortgage, no children and a short commute experiences something quite different from a renting family with childcare costs and a long drive.
The categories that have consistently outpaced headline inflation in most developed economies — healthcare, education, housing in supply-constrained cities — matter disproportionately for long-horizon planning, because they are exactly the costs that dominate later life.
What holds value and what does not
- Cash loses value at close to the full inflation rate unless the interest earned exceeds it.
- Fixed-rate bonds pay a nominal coupon, so unexpected inflation erodes the real return. Index-linked bonds exist specifically to solve this.
- Fixed-rate debt benefits the borrower — you repay in money worth less than what you borrowed. This is one reason long fixed-rate mortgages are attractive in inflationary periods.
- Equities and property have historically kept pace over long horizons, since revenues and rents adjust, though not reliably over short ones.
Common questions
What inflation rate should I use for long-term planning?
Two to three percent is the usual assumption for developed economies, reflecting central bank targets and long-run averages. Running the calculation at a higher rate as a stress test is sensible — plans that only work at low inflation are fragile.
Is this the same as the official CPI calculator?
No. Government CPI tools use actual recorded index values for historical periods, so they tell you what did happen. This one applies a constant rate you choose, which is the right approach for projecting forward but not for looking back.
How does inflation affect my salary?
A raise below the inflation rate is a real pay cut. If prices rose 4% and your salary rose 2%, your purchasing power fell by roughly 1.9%. Comparing raises against inflation rather than against zero is the more useful test.
What is the difference between inflation and cost of living?
Inflation measures the change in prices over time in one place. Cost of living compares price levels between places at the same time. A city can have low inflation and a high cost of living simultaneously.