What this answers
Two views of the same equation:
Forward: how much will the same goods cost N years from now? If a $1,000 grocery cart at today’s prices grows with 3% inflation, it’ll cost about $1,344 in 10 years and $1,806 in 20.
Backward: how much purchasing power does $1,000 in cash today retain N years from now? The same $1,000 buys about $744 worth of today’s goods after 10 years at 3% inflation, and $554 after 20.
Both are the same compound formula run in opposite directions. The forward number is what you’d quote in 2046 dollars; the backward number is what your money is worth in 2026 dollars.
Why this matters more than people think
Cash held in a savings account at 0.5% interest under 3% inflation loses 2.5% of its value every year, guaranteed, not a market risk. Over 30 years, $10,000 in cash becomes worth about $4,200 in today’s purchasing power. That’s not “the bank screwing you”, it’s how money works under inflation. The bank isn’t taking the difference; the cost of stuff is rising while your number sits still.
This is why retirement-planning math always uses inflation-adjusted (real) returns rather than nominal ones. A “6% return” on retirement assets sounds like growth, but if inflation is 3%, the real return is only 3%. You’re getting half of what the headline number suggests.
Reference inflation rates
Long-run averages and recent reference points:
- US long-run average (1913-2024): ~3.1%
- US 30-year average (1990-2020): ~2.5%
- 2021-2023 spike: 4.7%, 8.0%, 4.1%, the highest sustained rate since the 1980s
- Federal Reserve target: 2% (PCE-based)
- Eurozone (ECB target): 2%
- Japan (1990-2020): ~0.3%, near-zero, periodic deflation
- Argentina (2023): 211%, high-inflation economy
- Hyperinflation episodes: Venezuela 2018+, Zimbabwe 2008, Weimar Germany 1923
For long-term planning purposes, 3% is a reasonable default. For shorter horizons, look at recent CPI prints, 2023 finished at 3.4% in the US.
How CPI relates to your actual costs
The CPI (Consumer Price Index) tracks a “basket” of goods and services that’s a national average. Your personal inflation rate depends on what you actually spend on:
- Healthcare and college tuition historically inflate faster than CPI (4-6%)
- Housing tracks closely to CPI but varies wildly by region
- Tech goods tend to deflate (a $1,000 laptop in 2010 had less power than a $500 laptop in 2024)
- Energy and food are the most volatile components
If your spending skews heavily toward healthcare or college, the calculator’s projection at 3% understates what you’ll actually face. For a more honest projection, use 4-5%.
What “inflation” doesn’t capture
CPI methodology has known criticisms, it adjusts for “hedonic” quality improvements, substitutes when prices rise (assumes you’ll switch from steak to chicken), and excludes asset prices like stocks and houses from the headline number. Real-life experience of inflation often feels worse than the official number, especially when housing or healthcare costs spike.
The calculator uses a single annual rate, which is a simplification, real inflation isn’t uniform across years. For planning purposes, a flat assumption is fine; for backward-looking precision, the BLS publishes month-by-month CPI data.
Frequently asked questions
What inflation rate should I use for retirement planning? Most planners use 2.5-3% as the default. If you’re conservative, use 4%. The compounding over 30+ years makes the rate selection significant, a 1% difference at 30 years means about 35% more or less projected cost.
Why does my $50K from 1990 feel like more than $108K today? It probably is, in some specific ways. CPI says $50K in 1990 = $123K in 2024 nominal dollars. But housing prices have outpaced general CPI, while electronics have undershot. Whether your 1990 income “felt richer” depends on what you spent it on.
Is deflation possible? Yes, Japan experienced periodic deflation for decades. Sustained deflation is bad for the economy because people delay purchases waiting for lower prices, which depresses demand. The calculator handles negative inflation rates (just enter a negative number).
How does this differ from compound interest? Same formula, opposite intent. Compound interest grows wealth at a positive rate; inflation erodes purchasing power at a positive rate. If your interest rate equals inflation, you break even on real terms.