Inflation Calculator

Why Compounding Changes The Answer

People instinctively multiply: 3% for 24 years feels like 72% of value gone. It is not. Each year's increase applies to an already higher price level, so the price index reaches 2.03 after 24 years and buying power falls to 49.2% — roughly half, not a quarter left. The rule of 72 (72 divided by the rate) is the shortcut for the halving point, and it is accurate to within a few months for rates between 1% and 8%.

Two Numbers, One Relationship

• Inflating: FV = PV × (1 + i)ⁿ answers "what will this cost later" or "what is a past sum worth now".
• Deflating: PV = FV ÷ (1 + i)ⁿ answers "what will this money still buy" or "what is today's sum in old money".
• They are inverses, so a 100% price rise is a 50% loss of buying power, not a 100% loss.
• Percentages of price rise and percentages of power lost are never equal — quoting one as the other is the most common inflation error.

Your Personal Rate Is Not The Headline Rate

Headline CPI is a weighted average basket for a typical household. If a large share of your spending goes on rent, childcare, insurance or medical care, your effective rate can run one to three points above the published figure for years at a time. Renters and retirees in particular tend to face a different basket from the one the index measures, so it is worth raising the rate input above the official number when planning long horizons.

What This Means For Cash And Income

• Cash earning less than inflation loses real value every year, even though the balance never falls.
• Real return is approximately the nominal return minus inflation; exactly, it is (1 + r) ÷ (1 + i) − 1.
• A fixed pension or annuity with no indexation buys steadily less each year — the same arithmetic as the table above, applied to income.
• Deflation (a negative rate) reverses the effect: money buys more later, but it usually accompanies weak demand and falling wages.