Inflation: the invisible tax on your money
When prices rise, every dollar buys a little less. Over one year you hardly notice; over ten or twenty, the effect is large. This calculator answers three questions: what your money will be worth later, what something will cost in the future, and whether your savings return keeps up with rising prices.
The formulas
The cumulative inflation factor over N years is (1 + i)^N, where i is the average annual inflation rate.
- Future purchasing power = amount ÷ (1 + i)^N
- Future cost = current price × (1 + i)^N
- Loss of purchasing power = 1 − 1 ÷ (1 + i)^N
- Real return = (1 + nominal return) ÷ (1 + i) − 1
The real-return formula is more accurate than simply subtracting inflation from your return, especially when rates are high.
Worked example: $10,000 over 10 years
With average inflation of 3% a year:
- Cumulative factor: 1.03¹⁰ ≈ 1.344, so prices rise by 34.4%.
- Future purchasing power: 10,000 ÷ 1.344 ≈ $7,441 in today’s money.
- Something that costs $10,000 today will cost about $13,439.
- If the money sits in a savings account paying 4%, the real return is about 0.97% a year, and the balance is worth about $11,014 in today’s dollars after ten years.
Impact by inflation rate ($10,000 over 10 years)
| Annual inflation | Future purchasing power | Future cost | Loss |
|---|---|---|---|
| 1% | $9,053 | $11,046 | 9.5% |
| 2% | $8,203 | $12,190 | 18.0% |
| 3% | $7,441 | $13,439 | 25.6% |
| 4% | $6,756 | $14,802 | 32.4% |
| 5% | $6,139 | $16,289 | 38.6% |
| 8% | $4,632 | $21,589 | 53.7% |
A few extra points of inflation make a big difference over a decade.
Which inflation rate should I use?
The Federal Reserve targets 2% inflation measured by the PCE price index, and the Bank of England targets 2% CPI. Over the long run, US consumer prices have risen a little over 3% a year on average, with spikes in the 1970s, 1980 and 2022. For long-term planning, 2.5–3% is a sensible base case; test a higher rate to stress-test your plan.
Your personal inflation rate
Official indexes track an average basket of goods. Your own inflation depends on what you buy: households that spend a large share on rent, food, energy or childcare felt a much sharper rise in 2022–2023 than the headline figure. Adjust the rate if your main expenses behave differently.
Protecting your savings
- Keep only what you need for day-to-day spending in a non-interest-bearing account.
- In the US, I bonds and TIPS adjust with CPI; in the UK, index-linked gilts and some savings products do the same.
- Over long periods, diversified stocks and real estate have historically outpaced inflation, with more volatility.
- When negotiating pay, remember that a 3% raise with 3% inflation only maintains your purchasing power.