Inflation Impact Calculator

• Future cost, future purchasing power, and the percentage of value lost.
• Checks whether your savings return and your pay rises are actually beating inflation.
• Separate category rates, because your personal inflation is not the headline number.
• Scenario table at 2%, 4% and 6%, since a single assumed rate over decades is false precision.

The two calculations

Everything on this page comes from two formulas that are inverses of each other.

What something will cost later — compounding forward:

future cost = today's cost × (1 + inflation)^years

What today's money will buy later — discounting back:

purchasing power = today's amount ÷ (1 + inflation)^years

At 2.5% over 20 years, $50,000 of spending becomes $81,930, and $50,000 sitting idle buys what $30,513 buys today. Roughly 39% of the purchasing power is gone.

A useful shortcut is the rule of 72: divide 72 by the inflation rate to get the approximate years for prices to double. At 3%, that is 24 years. At 6%, twelve. The rule works because it approximates the logarithmic relationship behind compounding, and it is accurate enough for mental arithmetic in the 4%–10% range.

Nominal return, real return, and why the difference decides everything

A savings account paying 4% while inflation runs at 2.5% is genuinely growing your wealth. The same account at 4% while inflation runs at 6% is shrinking it, despite the balance rising every month. This is the distinction between nominal and real return, and it is where most intuitive reasoning about money goes wrong.

The exact relationship, rather than the subtraction shortcut:

real return = [ (1 + nominal) ÷ (1 + inflation) ] − 1

At 4% nominal and 2.5% inflation: (1.04 ÷ 1.025) − 1 = 1.46%. Subtracting gives 1.5%, close enough for one year but meaningfully different when compounded over decades. This calculator uses the exact form.

The consequence worth internalising: cash is not risk-free. It is free of market risk and exposed to inflation risk. Over a year, that exposure is trivial. Over twenty years, holding a large balance in a low-yield account is one of the most reliable ways to lose purchasing power — quietly, without any statement ever showing a loss.

Your inflation rate is not the published one

Published inflation figures measure a broad basket of goods and services, weighted to represent an average household. Almost nobody is that household.

Categories have diverged substantially over long periods. Housing, healthcare, childcare and education have generally risen faster than the overall index; many manufactured goods, electronics and some services have risen more slowly or fallen. The result is that a young family paying childcare and rent experiences a very different rate from a mortgage-free retiree whose largest variable cost is healthcare.

Two practical consequences:

• If a large share of your budget sits in fast-inflating categories, using the headline rate for planning understates what you will need.
• The composition changes over a lifetime. Retirement planning in particular is sensitive to healthcare costs, which have historically risen faster than the general index.

The category rate fields under Advanced let you model this: put your own estimate for the parts of your budget that behave differently and see what they do to the total.

Who inflation helps and who it hurts

Inflation is not uniformly bad. It redistributes.

It hurts:

• Holders of cash and long-dated fixed-rate bonds, whose future payments are worth less.
• Anyone on a fixed income that is not indexed — a pension without a cost-of-living adjustment loses purchasing power every year.
• Workers whose pay rises lag inflation. That is a real pay cut, however it feels.

It helps:

• Borrowers with fixed-rate debt. A mortgage payment fixed in nominal dollars becomes a smaller share of a rising income over time. This is a genuine and often overlooked advantage of fixed-rate borrowing.
• Owners of real assets — property, businesses, and to a considerable extent equities — whose values and cash flows can rise with the price level, though not reliably in the short term.

This is part of why a fixed-rate mortgage and inflation-linked income together are a more comfortable combination than cash savings and a fixed pension.

What actually protects purchasing power

• Owning productive assets. Equities represent claims on businesses that can raise prices. Over long periods they have substantially outpaced inflation; over short periods the relationship is loose and sometimes inverted.
• Inflation-linked government bonds. Principal adjusts with the published index, providing direct protection. The trade-off is a lower yield in exchange for the guarantee, and specific tax treatment worth understanding.
• Fixed-rate debt. Not an investment, but a hedge: the real burden of the repayment falls as prices and incomes rise.
• Income that adjusts. Skills that command rising pay, or a business that can raise prices, are the most direct protection most people have. Social Security includes an annual cost-of-living adjustment; many private pensions do not.
• Not holding excess cash. Keep the emergency reserve, and question the balance beyond it. Use the Emergency Fund calculator to size the amount that genuinely needs to be liquid.

Common mistakes

Planning in nominal dollars. A retirement target set thirty years out in today's money will be badly short. Convert to future dollars, or plan in real terms throughout — but do not mix the two.

Judging savings by the balance. A rising balance can still be losing purchasing power.

Assuming a pay rise below inflation is a rise. A 2% increase against 4% inflation is a 2% real pay cut.

Thinking falling inflation means falling prices. A lower inflation rate means prices are rising more slowly. They do not go back down. Purchasing power lost during a high-inflation period stays lost unless income catches up.

Using the headline rate for a very different budget. Covered above.

Over-correcting. The response to inflation risk is a sensible allocation to real assets, not abandoning safety entirely. An emergency fund still belongs in cash, accepting the erosion as the price of liquidity.

Frequently asked questions