INVESTING

Inflation Calculator

Inflation quietly shrinks what your money can buy every year. This calculator shows what today’s prices become in the future, and what cash kept aside will really be worth in today’s money. Enter an amount, a number of years and an expected inflation rate, then press Calculate to see the difference in plain figures.

How to use this inflation calculator

1. Enter an amount today, in dollars. It can be a price, a regular bill, or a pot of cash you are thinking about: a month of groceries, a year’s spending, or the balance sitting in a savings account.
2. Enter the years from now you want to look ahead. Match it to your plan, such as the years until you retire or until a big cost like college falls due.
3. Enter the expected annual inflation rate. The Federal Reserve targets about 2% a year and the long-run US average is around 3%, so testing a range between 2% and 4% gives you a sensible spread of outcomes.
4. Press Calculate. You will see the future cost of what costs this amount today, what this amount of cash will buy then in today’s money, the buying power lost as a percentage, and roughly how long prices take to double.

A worked example

Say something costs $1,000 today, and inflation runs at 3% a year for the next 10 years.

In 10 years that same item will cost $1,343.92. The price has risen by more than a third, even though the yearly rate sounded small, because each year’s rise lands on top of the last one.

Now look at it from the other side. If you keep $1,000 in cash under the mattress for those 10 years, it will buy only what $744.09 buys today. That is a loss of 25.59% of its buying power without a single dollar leaving the drawer. At 3% inflation, prices roughly double in 24.00 years, so money held as cash for a full retirement can lose half its value or more. This is why long-term savings need a return above inflation just to stand still.

The Bureau of Labor Statistics publishes the official U.S. inflation figures every month.

Related calculators

• Retirement Calculator: check whether your savings are on track to fund the monthly spending you want in retirement.
• Investment Calculator: project what a starting amount plus regular monthly investing could grow to over time.
• Rule of 72 Calculator: find roughly how many years it takes your money to double at a given rate of return.
• Savings Goal Calculator: work out how much to save each month, and how long a savings goal will take to reach.

How this inflation calculator works

Inflation compounds just like interest. Each year, prices rise by the inflation rate on top of the previous year’s prices, so this calculator grows the amount by a factor of one plus the inflation rate, raised to the power of the number of years. At 3% inflation, prices after ten years are more than 30% higher, because each year’s rise applies to an already higher level, and that compounding is why a small yearly rate does large damage over decades.

Cash under the mattress, or in a zero-interest account, loses value at exactly the inflation rate. The notes themselves stay the same, but what they can buy falls every year, which is why this calculator also shows the future buying power of that cash in today’s money: the amount divided by the same growth factor.

Investments therefore need to beat inflation, after tax, just to stand still. The return left over after inflation is the real, or inflation-adjusted, return, and it is that real return, not the headline return, that decides whether your money is truly growing in what it can buy.

Practical tips

• Keep only your emergency fund and short-term money in cash, and invest longer-term money so it has a chance to beat inflation.
• Check that pay rises at least match inflation, or your standard of living is quietly falling.
• Series I savings bonds and TIPS are built to track inflation, for the cautious part of a portfolio.
• Review big future costs (college, retirement) in future prices, not today’s.

Frequently asked questions

What is inflation?

Inflation is the general rise in prices over time, which reduces what each dollar buys. As prices rise, the same amount of money buys less than it did before.

How is inflation measured?

In the US, inflation is measured mainly by the Consumer Price Index, which tracks the cost of a basket of everyday goods and services and compares that cost over time.

What is a normal inflation rate?

The Federal Reserve targets about 2% a year. The long-run US average is around 3%, with some years far higher, so it is sensible to test your plans with a range of rates.

How do I protect my money from inflation?

Invest for returns above inflation over the long term, keep cash holdings lean, and consider inflation-linked bonds for money that must keep its value.