Why a fixed sum buys less each year
Inflation is the general rise in prices. Even at a mild 2–3% a year it compounds, so the effect on a decade-long plan is large. Prices rise by about a third in ten years at 3%, and by almost half in fourteen.
That matters most for long-term goals such as retirement, a child’s education or a house deposit: the amount you need in the future is higher than the amount that would cover it today.
Two ways to read the result
The Future price view answers “what will this cost later?”, useful when setting a savings target. The Purchasing power view answers “what will my money be worth later?”, useful when judging cash that earns little or no interest.
Both come from the same calculation, so the percentage that prices rise is always larger than the percentage of value lost.
Using it in planning
When you set a long-term goal, raise it by the inflation figure before working out how much to save. For example, enter your target in today’s money here, take the future price, and use that as the goal in the savings goal calculator.
Questions people ask
How is future cost calculated?
Future cost = amount × (1 + inflation rate)^years. At 3% a year, something that costs 1,000 today costs about 1,344 in ten years.
What is purchasing power?
It is how much a fixed sum of money can buy. If prices rise 3% a year, 1,000 kept in cash will only buy what about 744 buys today after ten years. It is the same maths as future cost in reverse.
What inflation rate should I use?
Central banks in the US, the UK and the eurozone target roughly 2% a year, though actual rates have been higher and lower in recent years. Check your official statistics office for the latest figure, and try a range such as 2%, 3% and 5%.
Does this use real historical data?
No. It applies one steady yearly rate that you choose. Past price indexes such as the CPI or HICP would give exact historical comparisons, but they depend on dated figures and the country, which this tool does not include.
How can I protect savings from inflation?
Earning interest at or above the inflation rate keeps purchasing power steady. Use the compound interest calculator to see what rate your savings need, remembering that tax can reduce the real return.