Inflation Calculator
Inflation works in both directions, and both are useful. Forwards it tells you what something will cost later. Backwards it tells you what a future sum is actually worth in money you understand today — which is the honest way to read any long-range projection.
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Formula
Two questions, one formula
Ask it forwards and you get the price of a basket of goods after a stretch of inflation. Ask it backwards and you get the present value of a future amount. The second is the more useful discipline: a retirement projection of a million is a very different proposition depending on whether that is a million in today's money or in money thirty years from now.
Why the official rate may not be your rate
Headline inflation measures a broad basket. Your personal rate depends on what you actually buy. Households where rent, childcare, insurance or medical costs take a large share often experience inflation well above the published figure, because those categories have risen faster than the average for extended periods.
What it means for savings
Cash earning less than the inflation rate loses purchasing power even though the balance grows. That is not an argument against holding cash — an emergency fund has a job that has nothing to do with returns — but it is an argument against holding far more than you need in it for decades.
Compounding runs both ways
Three percent sounds mild. Over thirty years it removes roughly six tenths of purchasing power. The same exponent that makes investing powerful makes inflation relentless.
Frequently asked questions
What is a normal inflation rate?
Many central banks target around two percent a year. Actual rates vary substantially, and there have been extended periods both well above and slightly below that target.
How do I adjust an investment return for inflation?
Roughly, subtract inflation from the nominal return to get the real return. More precisely, divide: (1 + nominal) / (1 + inflation) − 1.
Does inflation help borrowers?
On fixed-rate debt, yes, in the sense that you repay with money worth less than the money you borrowed. This is not a reason to borrow, but it is why fixed-rate long-term debt behaves differently from variable-rate debt during inflationary periods.