Inflation formulas
Purchasing power = Amount ÷ (1 + i)t
i is the annual inflation rate as a decimal and t is the number of years. The first formula tells you how much money you will need in the future to buy what the amount buys today. The second tells you what a future amount will be worth in today’s money.
Why inflation matters for planning
- Retirement: an income that feels comfortable today will fall short in 25 years unless it grows. Our retirement calculator shows results in today’s dollars for this reason.
- Salary negotiations: a 2% raise during 4% inflation is a pay cut in real terms.
- Cash savings: money in an account paying 0.5% loses purchasing power each year when inflation is higher.
- Investment returns: subtract inflation from nominal returns to judge real growth. A 7% return with 3% inflation is roughly a 4% real return.
The Rule of 70
Divide 70 by the inflation rate to estimate how many years it takes prices to double. At 3%, prices double in about 23 years; at 5%, in about 14 years.
How to use the calculator
- Enter an amount of money.
- Enter an average annual inflation rate and the number of years.
- Choose the direction: what something costing that amount today will cost in the future, or what a future amount is worth in today’s money.
Inflation over time
| Annual inflation | $100 of goods after 10 years | After 20 years | After 30 years | Value of $100 in 20 years (today’s money) |
|---|---|---|---|---|
| 2% | $122 | $149 | $181 | $67 |
| 3% | $134 | $181 | $243 | $55 |
| 4% | $148 | $219 | $324 | $46 |
| 5% | $163 | $265 | $432 | $38 |
How inflation is measured
In the United States, the most widely quoted measure is the Consumer Price Index (CPI-U), published monthly by the Bureau of Labor Statistics. It tracks the prices of a basket of goods and services that urban consumers buy — housing, food, energy, transportation, medical care and more. The Federal Reserve targets 2% annual inflation, measured by a related index (PCE). Inflation since 1913 has averaged a little over 3% a year, but with large swings: about 13.5% in 1980, slightly negative in 2009 and about 8% in 2022.
Your personal inflation rate can differ from the official figure. Renters in fast-growing cities, households with large medical costs, or people who drive long distances may see higher increases than the average basket suggests.
Protecting your money from inflation
- Cash loses value when interest rates are below inflation. Keep emergency savings in a high-yield account, but invest long-term money.
- Stocks have historically outpaced inflation over long periods, though not every year.
- Treasury Inflation-Protected Securities (TIPS) and I bonds are U.S. government bonds whose value or interest rate is adjusted for CPI.
- Fixed-rate debt such as a mortgage becomes cheaper in real terms as wages and prices rise.
- Plan in real terms: for retirement and long-term goals, use returns after inflation or inflate your target amounts.
Real vs. nominal returns
A nominal return is what your account statement shows; a real return is what is left after inflation. Real return = (1 + nominal) ÷ (1 + inflation) − 1. A 5% savings rate during 3% inflation is a real return of about 1.9%. If the interest is taxed, the real after-tax return is lower still.