Inflation formulas
Future cost = Amount × (1 + i)t
Purchasing power = Amount ÷ (1 + i)t
Purchasing power = Amount ÷ (1 + i)t
i is the annual inflation rate as a decimal and t is the number of years. The first formula tells you how much money you will need in the future to buy what the amount buys today. The second tells you what a future amount will be worth in today’s money.
Example: With 3% inflation for 20 years, a lifestyle that costs $50,000 a year today will cost about $90,306. Looking the other way, $50,000 received in 20 years will buy only what about $27,684 buys today. Prices rise by about 80.6% in total.
Why inflation matters for planning
- Retirement: an income that feels comfortable today will fall short in 25 years unless it grows. Our retirement calculator shows results in today’s dollars for this reason.
- Salary negotiations: a 2% raise during 4% inflation is a pay cut in real terms.
- Cash savings: money in an account paying 0.5% loses purchasing power each year when inflation is higher.
- Investment returns: subtract inflation from nominal returns to judge real growth. A 7% return with 3% inflation is roughly a 4% real return.
The Rule of 70
Divide 70 by the inflation rate to estimate how many years it takes prices to double. At 3%, prices double in about 23 years; at 5%, in about 14 years.
Frequently asked questions
What is inflation?
Inflation is the general rise in prices over time. When inflation is 3%, something that costs $100 today costs about $103 a year from now — so each dollar buys a little less.
What inflation rate should I use?
The U.S. Federal Reserve targets 2% a year over the long run. Actual U.S. inflation has averaged a little over 3% a year since 1914, with large swings. For long-term planning, 2.5–3% is a reasonable assumption; test a higher rate to be cautious.
How do I calculate purchasing power?
Divide the amount by (1 + inflation rate)years. $50,000 in 20 years at 3% inflation will buy what about $27,700 buys today.
How can I protect my savings from inflation?
Money earning less than the inflation rate loses real value. Treasury Inflation-Protected Securities (TIPS), I bonds, diversified stock investments and real estate have historically helped savings keep pace with or beat inflation over long periods.