HOW IT WORKS
This calculator shows how inflation erodes purchasing power over time using the compound interest formula: Future Value = Present Value × (1 + inflation rate)^years. Enter a dollar amount, time period, and average inflation rate to see equivalent value.
UNDERSTANDING INFLATION
What is inflation? The rate at which the general level of prices for goods and services rises, eroding purchasing power. If inflation is 3%, something that costs $100 today will cost $103 next year.
Purchasing power: What your money can buy. $100 in 1990 had much more purchasing power than $100 today.
Compound effect: Inflation compounds annually. At 3% inflation, prices don't just increase 30% over 10 years—they increase 34.4% because each year's inflation builds on previous years.
Why it matters: Understanding inflation helps with long-term planning. A salary that seems high today may not be in 20 years.
HISTORICAL US INFLATION RATES
1913-2023 average: ~3.2%/year Since the Federal Reserve was created in 1913, US inflation has averaged about 3.2% annually.
1980s crisis: 10-14%/year Peak in 1980 at 14.6%. Fed Chairman Paul Volcker raised interest rates to 20% to combat it.
2000s stability: 2-3%/year Relatively stable inflation (2000-2020). Fed target is 2%.
2021-2023 surge: 5-9%/year Post-COVID inflation peaked at 9.1% in June 2022. Caused by supply chain issues, stimulus spending, and energy prices.
HOW TO PROTECT AGAINST INFLATION
Don't hold cash long-term: Cash in savings account loses 3% purchasing power annually. Invest instead.
Invest in stocks/real estate: Historically, stocks return 10%/year, real estate 8-10%. Both outpace inflation.
I Bonds (inflation-protected): US Treasury I Bonds pay inflation rate + fixed rate. Guaranteed to keep pace with inflation. Limit $10,000/year.
Negotiate salary increases: Ask for raises at least matching inflation (3%/year minimum). Without raises, your real income decreases 3%/year.
INFLATION AND RETIREMENT PLANNING
Why retirees are vulnerable: Fixed income (pension, Social Security) doesn't keep pace with inflation. If you retire on $50,000/year, you need $67,000/year in 10 years at 3% inflation.
Social Security is inflation-adjusted: Benefits increase with CPI annually (COLA - Cost of Living Adjustment).
Withdrawal rate rule: 4% rule assumes 3% inflation. Withdraw 4% of portfolio first year, then increase by inflation each year.