Estimate the future value of money and purchasing power based on historical or projected inflation rates.
Inflation is the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. It is often described as "too much money chasing too few goods." What costs $100 today might cost $150 in a decade, meaning your savings need to grow just to stay stagnant in real terms. Our Inflation Calculator helps you visualize this erosion of wealth and plan accordingly.
Most economists consider low, stable inflation (around 2% per year) to be a sign of a healthy economy. It encourages spending and investment. However, for the individual saver, inflation is a silent tax.
"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." - Ronald Reagan
The formula for calculating the future cost of an item due to inflation is identical to the compound interest formula:
If inflation is 3%, a $1.00 item becomes $1.03 next year, then $1.0609 the year after. This compounding effect is why prices seem to jump significantly over long periods (like 10 or 20 years).
Inflation rates vary wildly by country and decade.
Stocks, real estate, and commodities (like gold) tend to rise in value over time, often outpacing inflation.
Treasury Inflation-Protected Securities (TIPS) and Series I Savings Bonds are government-backed securities designed specifically to keep pace with inflation.
For long-term planning, a rate of 2.5% to 3.5% is standard for developed economies. If you want to be conservative (safer), use a higher rate like 4%.
Actually, inflation is good for borrowers with fixed-rate debt. If you have a 30-year fixed mortgage, you are paying back the bank with dollars that are worth less and less over time.