Inflation and purchasing power calculator

What does a purchasing power calculator show?

The IMF describes inflation as the rate at which prices rise over a period, usually a year. In the United States the best-known gauge is the Consumer Price Index (CPI), which the Bureau of Labor Statistics describes as a measure of the average change over time in the prices consumers pay for a representative basket of goods and services. Our explainer what is inflation covers how it is measured and why it happens.

The calculator turns an assumed yearly rate into two plain answers: what a basket costing your amount today would cost after n years, and what your amount would be worth then, expressed in today's prices.

How do you use the inflation calculator?

1. Amount today. Any sum, for example the cost of your monthly shopping or your savings balance.

2. Average yearly inflation (%). The rate you want to test. The Federal Reserve's goal is 2% a year, measured by a related index called PCE inflation. You can also type a negative number to model falling prices.

3. Years. From 1 to 80.

Results: Same basket would cost (future price), Today's money is worth (real value of your amount after n years) and Purchasing power lost (as a percentage).

How is it calculated?

With A the amount, i the yearly rate as a decimal and n the years, first find the price factor:

f = (1 + i)n

Then:

• Future cost = A × f
• Real value of A = A ÷ f
• Purchasing power lost = 1 − 1 ÷ f

To work out the actual average rate between two dates from published index levels, use the same idea in reverse: i = (CPIend ÷ CPIstart)1/n − 1.

Worked example: what does 3% a year for 10 years do to $1,000?

Note that the loss is not 3% × 10 = 30%. Because each year's price rise applies to an already higher price, the future cost grows by 34.4%, while the buying power of a fixed sum shrinks by 25.6%.

How do different inflation rates compare?

A few points of inflation compound into large gaps over long horizons. That is why savers compare the interest they earn with the inflation rate: at 4% interest and 3% inflation, the real gain is about 1.04 ÷ 1.03 − 1 = 0.97% a year, not 1%.

What does this calculator not tell you?

• Future inflation. The rate is your assumption. Nobody can know the average rate for the next decade.
• Your own inflation. The CPI is an average across many households and items. BLS notes it is not a complete cost-of-living measure, and your basket — rent, fuel, food, school fees — may rise faster or slower.
• Interest or returns. The tool treats your amount as cash that earns nothing. To include interest, first run the compound interest calculator, then deflate its result here.
• Who gains and loses. The IMF notes that people on fixed incomes lose real value as prices rise, while borrowers on fixed rates can benefit. See how interest rates affect markets.

What mistakes do people make when thinking about inflation?

• Multiplying instead of compounding. 3% for 10 years is a 34.4% rise in prices, not 30%.
• Treating a 'stable' token as inflation-proof. A dollar stablecoin is designed to track the dollar, so at best it keeps the dollar's purchasing power — and loses it at the same rate.
• Using one month's figure as a yearly average. Pick a rate that fits the whole period you are modelling.