How to Use the Inflation Calculator
- Enter an amount in today’s dollars.
- Enter an average annual inflation rate.
- Enter the number of years.
- Choose whether you want the future cost or the future purchasing power.
- Press Calculate.
Formula
Future cost = amount × (1 + inflation)^years Purchasing power = amount ÷ (1 + inflation)^years Cumulative inflation = (1 + inflation)^years − 1
Example Calculation
Something that costs $1,000 today would cost about $1,344 in 10 years at 3% inflation. Put another way, $1,000 held in cash would buy only about $744 worth of today’s goods.
What Is Inflation?
Inflation is the general rise in prices over time. It reduces the purchasing power of money: each unit of currency buys fewer goods and services than before.
How Inflation Compounds
Like interest, inflation compounds. A 3% rate does not add 30% over ten years but about 34%, because each year’s increase applies to the already-higher price level. Over 30 years the cumulative effect is far larger.
Why It Matters for Your Plans
Retirement income, savings goals and fixed incomes are all exposed. A plan that ignores inflation can look adequate in nominal terms and fall short in real terms. Investments that have historically outpaced inflation, and income that adjusts for it, help protect purchasing power but carry their own risks.
Tips
- Express long-term goals in today’s dollars and then inflate them.
- Compare your savings rate with the inflation rate.
- Use the retirement calculator to build inflation into your plan.
Common Mistakes
- Using nominal returns when planning spending power.
- Assuming a single rate will hold for decades.
- Ignoring that your personal inflation may differ from the average.