How inflation affects purchasing power
CalcuMetro editorial team · Published · 1 min read
Inflation is a general, sustained rise in prices. When prices go up, the same amount of money buys less: your purchasing power falls.
How inflation is measured
It is usually measured with the consumer price index (CPI), published by each country's national statistics office from a representative basket of goods and services. Its yearly change is the inflation rate.
The purchasing power formula
Future purchasing power = C / (1 + π)^t · Equivalent amount = C × (1 + π)^t
- C: current amount.
- π: average annual inflation, as a decimal.
- t: number of years.
A 10-year example
With average inflation of 3% a year, €1,000 kept for 10 years will be worth €744.09 in today's money: it will have lost €255.91 of purchasing power. Put another way, you'll need €1,343.92 to buy what €1,000 buys today, because prices will have risen by a cumulative 34.39%.
The rule of 72
To quickly estimate how many years it takes for prices to double, divide 72 by the inflation rate. At 3% a year, 72 / 3 = 24 years; the exact calculation gives a cumulative rise of 103.28% over that period. It's a useful approximation for moderate rates.
Inflation and savings
For your savings to keep their purchasing power, their return after taxes and fees must at least match inflation. The real return is calculated as:
Real return = (1 + nominal return) / (1 + inflation) − 1
For example, a 3% return with 3% inflation is a real return of 0%.
Sources
National statistics offices that publish the CPI:
Educational content with illustrative examples; not financial, tax or legal advice.