Inflation Calculator

Inflation does not reduce the number in your account. It reduces what that number buys - which is why the erosion is easy to overlook until the gap becomes large.

At 3% a year, the money roughly halves in purchasing power every 24 years - which the Rule of 72 estimates as 72 / 3 = 24, against an exact 23.4. Two-thirds of the original value is gone after thirty years while the balance still reads $100,000.

Note. This is the particular danger of holding large cash balances long term. Cash is safe in nominal terms and risky in real terms - the loss is certain, just invisible on the statement.

The simplified rule - subtract inflation from the nominal rate - is close enough at ordinary levels to be useful for mental arithmetic, but it overstates the real return slightly. The exact division matters more when either figure is large.

The critical row is the last two: a positive 6% nominal return with inflation at or above it means your purchasing power is falling despite a growing balance.

• Consumer price indices track a basket of typical household purchases - food, housing, transport, energy, clothing, healthcare - weighted by what households actually spend.
• Headline versus core. Core excludes food and energy because they are volatile month to month. Core is smoother and often preferred for judging the underlying trend; headline is what you actually pay.
• Your personal rate differs. If your spending is concentrated in housing and childcare while the index weights them differently, your experience will diverge - sometimes substantially.
• Substitution effects - when one item rises, people switch to cheaper alternatives, and indices partially allow for this, which means the index can understate the impact on anyone who does not switch.
• Quality changes are adjusted for, imperfectly - a product that costs more but lasts longer is not treated as pure inflation.

1. Investments rather than cash for long horizons - equities have historically outpaced inflation over long periods, though with substantial volatility along the way.
2. Inflation-linked bonds - principal and coupons adjust with an index, providing direct protection, at a lower real yield than nominal bonds in some environments.
3. Savings that track inflation - some government savings products adjust with an index and often carry purchase limits.
4. Fixed-rate debt is helped by inflation - you repay in cheaper currency. This is one of the few cases where inflation works in your favour, and it is why long fixed-rate borrowing at low rates has historically been advantageous.
5. Wage and price-setting - in a high-inflation period, check whether income is keeping pace; a nominal raise below inflation is a real pay cut.
6. Do not hold excess cash long term purely for safety without acknowledging the certain real loss it carries.

• Retirement planning - convert future figures into today's money before judging whether they are adequate.
• Comparing offers over time - a lump sum now versus payments spread over years requires discounting to be comparable.
• Salary decisions - test whether a rise is real by comparing it against assumed inflation.
• Insurance and annuities - a fixed payout looks stable but loses value steadily over a long term.
• Setting a return hurdle - an investment must clear inflation before it produces any genuine gain.

Note. Run the calculation at more than one inflation rate. The gap between 2% and 4% over thirty years is enormous, and basing a long-term plan on a single assumption is the most common source of shortfall.