What is inflation?
Inflation is the general rise in prices over time. When prices rise, each unit of money buys less — this is a fall in purchasing power. Even “low” inflation adds up: at 3% a year, prices roughly double in 24 years.
Two results, one calculation
- Future cost – what something that costs a given amount today will cost in the future.
- Future buying power – what a given amount of money today will actually be worth in the future, in today’s terms.
Inflation formulas
Future cost = Amount × (1 + r)years
Buying power = Amount ÷ (1 + r)years
where r is the average yearly inflation rate as a decimal.
Example
At 3.5% average inflation, something that costs 1,000 today will cost about 1,411 in 10 years. And 1,000 kept as cash will only buy what about 709 buys today — a loss of roughly 29% of its value.
The rule of 72
A quick way to estimate how long it takes prices to double: divide 72 by the inflation rate. At 4% inflation, prices double in about 72 ÷ 4 = 18 years. At 8%, it is just 9 years.
How to protect your money from inflation
- Aim for savings and investments that earn more than the inflation rate.
- Avoid holding large amounts of cash for long periods.
- Review your savings goals regularly and increase them to match rising prices.
- Consider inflation when planning retirement — your costs in 20–30 years will be much higher.