Inflation Calculator: How It Works
Inflation is the quiet variable that ruins otherwise sound plans. A salary, a pension or a savings target that ignores it is measured in the wrong units. This calculator converts money across time so you can compare amounts honestly.
The two directions
Future cost — what something costing X today will cost later:
Future = Present × (1 + i)n
Present value — what a future amount is worth in today's money:
Present = Future ÷ (1 + i)n
The second is the one people skip and the one that matters most. A pension promising 50,000 a month in 25 years, at 6% inflation, has the purchasing power of about 11,650 a month today.
What inflation does over a working life
Cost of something priced 100 today:
| Years | At 3% | At 5% | At 7% |
|---|---|---|---|
| 5 | 116 | 128 | 140 |
| 10 | 134 | 163 | 197 |
| 20 | 181 | 265 | 387 |
| 30 | 243 | 432 | 761 |
At 7%, prices roughly double every decade. The Rule of 72 works here too: 72 ÷ inflation rate gives the years for prices to double. At 6%, twelve years.
Nominal versus real return
The number that matters on an investment is what is left after inflation.
Real return ≈ [(1 + nominal) ÷ (1 + inflation)] − 1
| Nominal return | Inflation | Real return |
|---|---|---|
| 7% deposit | 6% | 0.94% |
| 7% deposit, 30% tax | 6% | −1.13% |
| 12% equity | 6% | 5.66% |
| 3% savings account | 4% | −0.96% |
The second row is the one worth staring at. A guaranteed, insured, perfectly safe deposit can reliably lose purchasing power once tax and inflation are both applied. 'Safe' and 'preserves value' are not the same property.
Why your personal inflation rate differs from the headline
Official indices measure a representative basket. Yours is not representative. Healthcare and education have historically risen faster than general inflation in many countries; electronics have fallen. A household with school fees and medical costs experiences meaningfully higher inflation than the published figure, while one whose spending skews toward technology and discretionary goods experiences less. When planning for a specific goal — a degree, a surgery, a wedding — use the inflation rate of that category, not the national average.
Planning with it
- Retirement: inflate today's monthly expenses to your retirement year, then apply post-retirement inflation across the whole retirement period as well. Skipping the second step is the most common planning error.
- Education: education inflation frequently runs several points above general inflation. Use the higher figure.
- Salary: a raise below inflation is a pay cut. At 6% inflation, a 4% raise reduces your real income by about 1.9%.
- Emergency fund: sized in months of expenses, it self-adjusts — but only if you re-check the amount as your expenses rise.
Deflation and negative rates
The same formulas work with a negative rate. Deflation raises the purchasing power of cash but tends to accompany falling wages and rising real debt burdens, since the amount you owe does not shrink while everything else does. It is rarer than inflation and generally more damaging economically.
A limitation worth stating
The calculator applies a single constant rate. Real inflation moves year to year, sometimes sharply. For long horizons, run the calculation at two or three rates — an optimistic, a central and a pessimistic case — and plan against the range rather than a single number.