How the Inflation Calculator Works
Inflation is the general rise in prices over time. When prices rise, each dollar buys a little less than it did before. A loaf of bread that costs $2 today may cost $2.60 in ten years. The Inflation Calculator shows this in four ways, so you can plan for the future cost of things, judge the value of money you will receive later, measure past inflation, and see what your investments earn after inflation.
The basic idea
If prices rise by a steady rate each year, they compound, just like interest. After n years at an inflation rate of i, something that cost $1 now costs:
future cost = cost today x (1 + i)^n
The same formula run backward tells you what future money is worth today:
worth today = future amount / (1 + i)^n
The four things you can find
| Question | You enter | Formula |
|---|---|---|
| What will it cost in the future? | Price today, inflation rate, years | price x (1 + i)^n |
| What is future money worth today? | Future amount, inflation rate, years | amount / (1 + i)^n |
| What was the inflation rate? | Starting price, ending price, years | (end / start)^(1/n) - 1 |
| What is my real return? | Amount, investment return, inflation, years | (1 + return) / (1 + inflation) - 1 |
- Question: What will it cost in the future?
You enter: Price today, inflation rate, years
Formula: price x (1 + i)^n - Question: What is future money worth today?
You enter: Future amount, inflation rate, years
Formula: amount / (1 + i)^n - Question: What was the inflation rate?
You enter: Starting price, ending price, years
Formula: (end / start)^(1/n) - 1 - Question: What is my real return?
You enter: Amount, investment return, inflation, years
Formula: (1 + return) / (1 + inflation) - 1
A worked example: the future cost
Something costs $1,000 today. Inflation is 3% a year. In 10 years the same thing costs $1,000 x 1.03^10, which is $1,343.92, an increase of 34.39%. Turned around, $1,000 in 10 years buys only what $744.09 buys today. So the money has lost 25.59% of its buying power.
Chart: what $100 is worth in today's money
At 3% inflation, $100 buys less and less each year. The bar shows how much of today's buying power is left:
Today ████████████████████████████████████████ $100.00 Year 5 ██████████████████████████████████ $86.26 Year 10 ██████████████████████████████ $74.41 Year 15 ██████████████████████████ $64.19 Year 20 ██████████████████████ $55.37 Year 25 ███████████████████ $47.76 Year 30 ████████████████ $41.20
After 30 years at 3%, the money has lost more than half of its buying power.
Why the inflation rate matters
The same $1,000 item after 10 years, at different inflation rates:
| Inflation | Cost after 10 years |
|---|---|
| 2% | $1,218.99 |
| 3% | $1,343.92 |
| 4% | $1,480.24 |
| 5% | $1,628.89 |
| 7% | $1,967.15 |
Finding a past inflation rate
If you know what something cost at the start and at the end, the calculator finds the average yearly rate that connects them. For example, a basket of goods that cost $100 and now costs $180 after 20 years has risen 80% in total. That is an average of 2.98% a year. The average is not the same as the total divided by the number of years, because the rise compounds.
Real return: what your investments really earn
If your investment earns 7% a year, but prices rise 3% a year, you do not gain 7% in buying power. The real return is lower:
real return = (1 + investment return) / (1 + inflation) - 1
Here, that is 1.07 / 1.03 - 1, or 3.88% a year. Over 20 years, $10,000 grows to $38,696.84, but in today's money that is only $21,425.50. If your return is lower than inflation, your buying power shrinks, even though the balance goes up.
Good to know
- Inflation is not the same for every product. Housing, health care, education and food can rise faster or slower than the average.
- A steady rate is a simplification. Real inflation moves from year to year. Long-run averages in many countries have often been around 2% to 3%, but this changes.
- Saving in cash that pays less than inflation loses buying power. That is why many people invest for the long term.
- Salaries also need to keep up. A raise smaller than inflation is a pay cut in real terms.
What this calculator does not include
- Official price indexes, such as the Consumer Price Index. You enter the rates yourself, and can find official figures from your government's statistics office.
- Taxes on investment gains, which lower your real return further.
- Changes in what people buy. Official indexes adjust for that, and a single rate does not.
This tool gives an estimate for general information only. It is not financial advice. Future inflation cannot be predicted.