Inflation is the rate at which the general level of prices for goods and services rises. When inflation is 3%, a dollar buys 3% less next year than it does today. The Consumer Price Index (CPI) is the most common measure of inflation.
The Real Cost of Inflation
Inflation's effects compound just like interest — but in the opposite direction. Here's what $100,000 in today's dollars is worth at different inflation rates:
At 2% Inflation
In 10 years: $82,034
In 20 years: $67,297
In 30 years: $55,207
At 3% Inflation
In 10 years: $74,409
In 20 years: $55,368
In 30 years: $41,199
At 5% Inflation
In 10 years: $61,391
In 20 years: $37,689
In 30 years: $23,138
How to Calculate Future Value
Future Value = Present Value / (1 + inflation_rate)^years
Example: $100,000 at 3% inflation for 20 years = $100,000 / (1.03)^20 = $55,368 in today's purchasing power.
How to Protect Your Money from Inflation
- Invest in stocks: Historically, the S&P 500 returns ~10% annually, well above inflation
- Real estate: Property values and rents tend to rise with inflation
- TIPS (Treasury Inflation-Protected Securities): Government bonds indexed to inflation
- Negotiate raises: Aim for increases above the inflation rate to maintain purchasing power
- Avoid cash savings as primary strategy: Savings accounts at 1-2% lose to typical 2-3% inflation
Calculate Inflation's Impact
Use our Inflation Calculator to see how purchasing power changes over time, our Compound Interest Calculator to compare investment growth vs. inflation, and our Retirement Calculator to factor inflation into your retirement planning.