Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Over time, even modest inflation can significantly erode the value of your money. This calculator helps you visualize the impact of inflation on a specific sum of money.
How it Works
The calculator uses a compound formula to estimate the future value of your initial amount, taking into account a constant annual inflation rate over a specified number of years. It then calculates the loss in purchasing power by comparing the initial amount to its future inflated value.
The Formulas
The future value (FV) of an amount after inflation is calculated using the following compound interest formula:
FV = P * (1 + r)^n
Where:
FV is the Future Value of the money.
P is the Principal amount (the Initial Amount).
r is the annual inflation rate (expressed as a decimal).
n is the number of years.
To use the rate in the formula, you must convert the percentage to a decimal. For example, an annual inflation rate of 3% becomes 0.03.
The loss in purchasing power is the difference between the future value and the initial amount:
Purchasing Power Loss = FV - P
Or, more intuitively, it represents how much more money you would need in the future to buy the same basket of goods you could buy today with your initial amount.
Use Cases
Financial Planning: Estimate how much savings you'll need for future goals like retirement, education, or large purchases to maintain your current lifestyle.
Investment Returns: Understand how much your investment returns need to outpace inflation to achieve real growth in purchasing power.
Budgeting: Anticipate how costs might increase for regular expenses over time.
Economic Understanding: Gain insight into the persistent impact of inflation on personal finance.
Example Calculation
Let's say you have $1,000 today and expect an annual inflation rate of 3% for the next 10 years.