Money guide
How inflation affects purchasing power
Inflation is the rate at which prices rise. Money sitting still keeps the same number on it, but buys a little less each year. Percentages let you measure exactly how much less.
Measuring the inflation rate
Inflation is a percentage increase in prices, usually measured with a price index such as a consumer price index (CPI).
Inflation % = (new index − old index) ÷ old index × 100
An index moving from 300 to 309: 9 ÷ 300 × 100 = 3%
What your money will buy in the future
Divide today's amount by the growth factor of prices over the period. Prices compound, so raise one plus the rate to the power of the number of years.
Future buying power = amount ÷ (1 + inflation)^years
$10,000 after 10 years of 3% inflation: $10,000 ÷ 1.03^10 = $10,000 ÷ 1.3439 = $7,440.94
| Inflation | After 5 years | After 10 years | After 20 years |
|---|---|---|---|
| 3% a year | $8,626.09 | $7,440.94 | $5,536.76 |
| 5% a year | $7,835.26 | $6,139.13 | $3,768.89 |
At 5% inflation, cash left untouched for 20 years loses more than 60% of its buying power, leaving about $3,769 of today's spending power.
Future prices
The same growth factor tells you what something will cost later.
Future price = today's price × (1 + inflation)^years
A $4.00 item after 10 years at 3%: $4.00 × 1.3439 = about $5.38
Finding an old price from today's price
If you know the price now and how much it rose, divide by one plus the increase. Do not subtract the percentage from today's price.
An item now costs $54 after an 8% rise: $54 ÷ 1.08 = $50.00
Taking 8% off $54 gives $49.68, which is wrong.
The find original price from percentage calculator works backwards like this for you.
Real return on savings
Your real return is what your savings grow by after inflation. Divide the growth factors rather than subtracting the rates for an exact answer.
Real return = (1 + interest rate) ÷ (1 + inflation) − 1
4.5% interest, 3% inflation: 1.045 ÷ 1.03 − 1 ≈ 1.46%
If your interest rate is below inflation, your real return is negative, even though your balance grows.
Common mistakes
- Adding yearly rates. Ten years of 3% is 34.4% total inflation, not 30%, because each year builds on the last.
- Mixing up percent and percentage points. Inflation falling from 4% to 3% is a 1 percentage point drop; prices are still rising. See the percentage points guide.
A handy shortcut: divide 72 by the inflation rate to estimate how many years it takes prices to double. At 3%, that is about 24 years. The Rule of 72 guide explains why it works. This guide is general education, not financial advice.