What is Inflation?
Inflation is the gradual increase in prices over time, which means your money buys less than it used to. That $100 in your pocket today won't buy as much in 10 years—this is the erosion of purchasing power.
Think about it this way: if your grandparents talk about buying a house for $20,000 or filling up a car for a few dollars, that's inflation in action. The average US inflation rate has been around 3% per year historically, though it varies significantly year to year.
Prices Rise Over Time
At 3% inflation, prices roughly double every 24 years
Purchasing Power Falls
Same money buys fewer goods and services over time
Savings Lose Value
Cash in a bank account loses real value if interest < inflation
Historical Context
Compare what money was worth in different eras
Why understanding inflation matters:
- Retirement planning — You'll need more than you think to maintain your lifestyle
- Salary negotiations — A 2% raise during 4% inflation is actually a pay cut
- Investment returns — "Real returns" matter more than nominal returns
- Long-term contracts — Fixed payments become cheaper to make over time
- Price comparisons — Compare historical costs to today's dollars fairly
How does inflation affect my money?
Inflation raises prices, so the same money buys less over time. There are two questions people usually want answered, and each has a simple formula where n is the number of years.
Future cost of today's money
Future = Present × (1 + inflation)n
How much a purchase that costs a set amount today will cost in the future.
Real (today's-money) value of a future amount
Real = Future ÷ (1 + inflation)n
What a future sum of money will actually be worth in today's purchasing power.
Worked example
$100,000 at 6% inflation for 30 years will cost about 100,000 × (1.06)30 ≈ $574,000 to buy the same goods. Put differently, today's $100,000 will feel like ≈ $17,400 in 30 years.
| Question | Formula | Result |
|---|---|---|
| Future cost of $100,000 in 30 years | 100,000 × (1.06)30 | ≈ $574,000 |
| Today's value of that $100,000 | 100,000 ÷ (1.06)30 | ≈ $17,400 |
The higher the inflation rate and the longer the time frame, the steeper the erosion — because inflation compounds, just like interest.
Real-World Inflation Examples
Here's how inflation has affected everyday prices over the years. These examples show why planning for inflation is essential.
The Coffee Example
A cup of coffee that cost $0.25 in 1970 would cost about $2.00 today (adjusting for inflation). That's an 8x increase over 50+ years at roughly 3.5% average annual inflation.
Movie Tickets
In 1980, average movie ticket: $2.69. In 2024: about $11.75. That's 4.4x—actually slightly above general inflation, as entertainment costs have risen faster than average.
Minimum Wage Purchasing Power
In 1968, minimum wage was $1.60/hour. Adjusted for inflation, that's about $14.00 in today's dollars—higher than the current federal minimum wage of $7.25.
College Tuition
Average public university tuition in 1980: $2,100/year. Today: about $10,500. That's 5x—well above inflation, making college relatively more expensive than it was.
The Rule of 72 for Inflation
Divide 72 by the inflation rate to find how many years until prices double. At 3% inflation: 72 ÷ 3 = 24 years. At 6% inflation: 72 ÷ 6 = 12 years. This helps you visualize how quickly purchasing power erodes.
Protecting Against Inflation
To maintain purchasing power, your investments need to earn at least the inflation rate. A savings account paying 1% when inflation is 4% means you're losing 3% of your real purchasing power each year. This is why many people invest in stocks, real estate, or Treasury Inflation-Protected Securities (TIPS).
Nominal vs real returns
The headline rate on an investment is the nominal return. To see how much your money actually grew in purchasing power, subtract inflation to get the real return. If you earn 7% while inflation runs at 3%, your money grew about 4% in real terms — and if your return is below inflation, your real return is negative even though the balance rose.
| Nominal return | Inflation | Approx. real return |
|---|---|---|
| 7% | 3% | ≈ 4% |
| 8% | 4% | ≈ 4% |
| 10% | 6% | ≈ 4% |
| 5% | 6% | ≈ −1% |
The quick subtraction (nominal − inflation) is close enough for planning; the exact formula is real = (1 + nominal) ÷ (1 + inflation) − 1. See our Investment and CAGR calculators to project growth in real terms.
A note on CPI
Historical inflation calculators measure the past using the Consumer Price Index (CPI) — an official basket of goods and services tracked by a national statistics agency, such as the U.S. Bureau of Labor Statistics, the Bank of England, or the Reserve Bank of Australia.
Our calculator instead uses an inflation rate you choose, so it works for any country, currency, or future scenario — not just one region's recorded history. If you want to model actual past purchasing power, use your country's published CPI figures for the years in question.
Frequently Asked Questions
References & methodology
Results are computed with the standard inflation equations Future = Present × (1 + inflation)n and Real = Future ÷ (1 + inflation)n, and cross-checked against the sources below. This page is for education only and is not financial advice.