Inflation Calculator
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How Inflation Works
Inflation is the gradual increase in the price of goods and services over time. When prices rise, each dollar you have buys less than it did before — this is called "purchasing power erosion." A basket of groceries that costs $100 today might cost $134 in ten years at 3% annual inflation.
Inflation is measured primarily by the Consumer Price Index (CPI), which tracks the average price change for a basket of common goods and services. The Federal Reserve actively manages monetary policy to target approximately 2% annual inflation, balancing economic growth with price stability.
The Formula
This is exponential growth. At 3% inflation, prices don't rise by 30% over 10 years — they rise by about 34%, because each year's increase compounds on the previous year's higher price.
Why Inflation Matters for Your Finances
- Retirement planning — If you retire in 25 years and need $5,000/month today, you'll need approximately $10,500/month at 3% inflation. Your retirement savings target must account for this.
- Salary negotiations — A 2% annual raise in a 3% inflation environment means a 1% real pay cut every year. Push for raises that at minimum match inflation.
- Cash savings lose value — Money in a checking account earning 0.01% loses roughly 3% of its purchasing power per year. High-yield savings accounts (4-5% APY) currently outpace inflation.
- Fixed-rate debt gets cheaper — Inflation benefits borrowers with fixed rates. A 30-year mortgage at 6.5% becomes relatively cheaper as your income (hopefully) rises with inflation.
- Education costs rise faster — College tuition has historically increased at 5-8% per year, well above general inflation. Start saving earlier and assume higher growth rates for education funds.
Frequently Asked Questions
What is the current inflation rate?
As of early 2025, the US inflation rate (CPI) is approximately 2.5-3%. The Federal Reserve targets 2% annual inflation as the ideal rate. Historically, US inflation has averaged about 3.3% per year since 1913. During the 2021-2023 period, inflation spiked to over 9% before moderating.
How does inflation affect my savings?
Inflation erodes purchasing power. If you have $100,000 in a savings account earning 1% while inflation is 3%, you're effectively losing 2% per year in real terms. After 10 years, your $100,000 would have the purchasing power of about $82,000. This is why investing is important for long-term savings.
What is the best hedge against inflation?
Historically, stocks, real estate, and commodities have outpaced inflation over long periods. Treasury Inflation-Protected Securities (TIPS) are specifically designed to keep pace with CPI. I Bonds offer inflation protection for up to $10,000/year per person. Diversification across asset classes provides the best overall protection.
How do I calculate real (inflation-adjusted) returns?
Subtract the inflation rate from your nominal return. If your investments returned 8% and inflation was 3%, your real return was approximately 5%. For more precision, use the formula: Real Return = ((1 + Nominal) / (1 + Inflation)) - 1. This tells you how much your purchasing power actually grew.