What it works out
Inflation is a general rise in prices. When prices rise, a fixed sum of money buys less than it did. The two formulas are the two sides of that: what today’s things will cost later, and what today’s sum will be able to buy later.
Because the rise compounds, its effect grows with time faster than intuition suggests. At a steady 3% a year a sum loses about a quarter of what it buys in ten years and about 45% in twenty.
Official inflation figures are averages over a fixed basket of goods and services, published by national statistics offices. One household’s prices can rise faster or slower than the average, and past figures say nothing certain about future ones. The rate here is yours to choose.
What the sum leaves out
- One rate is used for every year. Real inflation changes from year to year, and prices have at times fallen.
- Wages and interest are left out. They may rise too, or may not.
- It cannot look up past inflation. That needs a published price index, and this page holds no data.
Questions people ask
- What is purchasing power?
- What a sum of money can buy. If prices rise and the sum stays the same, its purchasing power falls, even though the number printed on it has not changed.
- How is inflation worked out by hand?
- Multiply by one plus the rate for each year. At 3%, something costing 100 costs 103 after one year and 100 × 1.03 × 1.03 = 106.09 after two. For many years, raise 1.03 to the power of the number of years.
- What is a real return?
- Growth after inflation. If a sum grows 5% in a year in which prices rise 3%, it buys about 1.94% more, not 5% more: 1.05 ÷ 1.03 − 1.
Arithmetic on figures you supply, for study. Educational information, not investment advice or a recommendation to trade. It takes no account of your circumstances, and nothing typed into the calculator is sent or stored.