Inflation is the slow, steady rise in prices. It's easy to ignore from one year to the next, but over a decade or more it changes what your money can buy. Knowing how it compounds helps you set realistic savings goals and decide whether an investment is actually getting ahead.
Inflation compounds like interest
Each year's price increase builds on the previous year's higher prices. So the future cost of something follows the same formula as compound interest:
Future cost = today's price × (1 + inflation rate)^years
At 3% a year, which is close to the long-run U.S. average:
| Years | $1,000 of purchases will cost |
|---|---|
| 10 | ≈ $1,344 |
| 20 | ≈ $1,806 |
In 20 years, the same groceries, rent, or tuition costs about 80% more.
The other side: purchasing power
If prices go up, a fixed amount of money buys less. To express a future amount in today's dollars, divide instead of multiplying:
Value in today's dollars = amount ÷ (1 + inflation rate)^years
$1,000 kept in cash for 10 years at 3% inflation buys only about $744 of today's goods. That's roughly a quarter of its purchasing power lost, even though the balance never changed.
A small change in the rate matters
Inflation doesn't stay at 3% every year. Compare two rates over 10 years:
| Inflation rate | Future cost of $1,000 | Today's value of $1,000 |
|---|---|---|
| 3% | ≈ $1,344 | ≈ $744 |
| 5% | ≈ $1,629 | ≈ $614 |
Two extra percentage points a year adds nearly $300 to the future cost of every $1,000 you spend.
The Rule of 72
For a quick estimate, divide 72 by the inflation rate. The result is roughly how many years it takes for prices to double, or for cash to lose half its value. At 3% that's 72 ÷ 3 = 24 years. At 6%, it's just 12.
What this means for your plans
- Savings goals: a goal that's years away will cost more than it does today, so build in some extra.
- Cash: money earning less than inflation loses value each year. A high-yield savings account at least narrows the gap.
- Investments: your real return is roughly your return minus inflation. A 7% gain during 3% inflation is about 4% in actual buying power.
Try it
The Inflation Calculator shows the future cost, the value in today's dollars, and the cumulative inflation for any amount, rate, and number of years. Then use the Savings Goal Calculator to plan for the inflation-adjusted amount, or the ROI Calculator to check whether an investment is beating inflation.