How to use the inflation calculator
There are three tools.
Future cost projects prices forward. Enter an amount in today’s dollars, such as a year of living costs, an average inflation rate and the number of years. The results show what the same goods will cost, what the cash will still buy, and how long it takes for prices to double. The chart draws both paths and the table gives each year.
From CPI converts dollars between two dates using Consumer Price Index readings you enter.
- Choose the direction: earlier dollars to later dollars, or the reverse.
- Enter the amount.
- Enter the CPI at both dates. The Bureau of Labor Statistics publishes the CPI-U, the index most people mean by “CPI”, every month. The defaults are round example values, not real readings.
- Add the years between the readings to get the average annual inflation rate.
Savings vs inflation checks whether a savings balance grows in real terms. Enter the balance, the interest rate, your inflation assumption, your tax rate on interest (leave it empty for a tax-advantaged account) and the number of years.
The formulas
Purchasing power of today’s money = Amount ÷ (1 + i)ni is the yearly inflation rate as a decimal and n the number of years.
Average inflation = (CPIlater ÷ CPIearlier)1/years − 1
A worked example
Future cost. At 3% inflation, a basket that costs $10,000 today will cost $18,061.11 in 20 years. Cash kept under the mattress will buy only $5,536.76 worth of today’s goods, a loss of 44.6% in purchasing power. Prices double in about 23.4 years.
From CPI. With example readings of 200 and 260, taken 10 years apart, prices rose 30.00%, or 2.66% a year. $100 at the earlier date is worth $130.00 at the later one.
Savings. $20,000 earning 4.5% with 22% tax on the interest grows to $28,239.25 in 10 years. With 3% inflation, that is $21,012.65 in today’s dollars: a real return after tax of +0.50% a year.
Small differences in inflation add up
| Inflation per year | Cost of $10,000 in 20 years | Buying power of $10,000 |
|---|---|---|
| 2% | $14,859.47 | $6,729.71 |
| 3% | $18,061.11 | $5,536.76 |
| 4% | $21,911.23 | $4,563.87 |
Over long periods, a single point of inflation changes the result by thousands of dollars on a modest amount. That is why retirement plans should be stress-tested with more than one inflation rate, and why the inflation input matters as much as the investment return.
Notice the asymmetry in each row: prices rising 80.6% means money losing 44.6% of its value, not the same percentage. A price level that doubles halves the value of a dollar.
Why savings can lose ground with positive interest
Tax is charged on the whole interest payment, including the part that only replaces what inflation took. In the example, the account pays 4.5%, but after tax it earns 3.51%, leaving a thin real return. Without the tax, the real return would be +1.46% and the balance would be worth $23,111.10 in today’s dollars.
At a 2% rate, the statement balance still grows to $23,348.39, but in today’s dollars it falls to $17,373.39, a real loss of $2,626.61. Nothing on the statement shows that loss, which is why the real figure is the one to watch. Holding cash for emergencies is still sensible; holding far more than you need for years is what costs money.
Choosing and finding inflation figures
- For the future, use an assumption, not last year’s figure. A single year of high or low inflation says little about the next twenty.
- For the past, use actual CPI readings. CPI-U covers urban consumers and is the headline measure; CPI-W, used for Social Security adjustments, and the chained CPI give slightly different numbers.
- Use matching readings. Compare the same month in both years, or annual average with annual average, and do not mix seasonally adjusted and unadjusted series.
- Your own inflation differs. The CPI tracks an average basket. If you spend more on rent, health care or tuition than the average household, your personal inflation rate can be higher.
PromtFinance does not include a CPI history; enter the readings you need.
What this calculator does not include
- Changing inflation. Each projection uses one steady rate. Real inflation varies from year to year.
- Deposits and withdrawals. The savings tool tracks a single balance. Use the savings calculator for regular deposits.
- Compounding within the year. Interest is credited and taxed once a year, so enter the APY, which already includes more frequent crediting.
- State tax unless you include it in the tax rate.