How this number is made
Inflation is the rise in prices, which is the same fact as a fall in what a dollar buys. Two questions get confused. “What will this item cost?” multiplies. “What will my cash be worth?” divides. This page shows both from one rate.
- Type a price you care about, or 100 if you want a percent-of-a-dollar story.
- Use a long-run guess, not last month’s headline, if the horizon is ten years.
- Read the second row before you celebrate a savings balance that only grew at the inflation rate. You may have stood still.
Formula
Future price = amount × (1 + inflation)^years. Purchasing power of the same amount = amount ÷ (1 + inflation)^years.
Worked example
One hundred dollars at 3% inflation for 10 years has the buying power of about $74 today, and the item that costs $100 now costs about $134. A savings account paying 3% only kept up.
Questions
Which inflation rate should I type?
There isn’t a personal CPI in this form. US CPI has often been discussed around 2–3% over long stretches, with ugly exceptions. Type the rate you are stress-testing, then change it.
Does this deflate a stock return?
Not by itself. If a portfolio assumption is 7% and inflation is 3%, a rough real return is about 4%, not 7% minus a vibe. Subtract them only as an approximation: (1.07 ÷ 1.03) − 1 is cleaner than 7 − 3.