Inflation Calculator
Understanding Inflation
Inflation is the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. A dollar today buys less than a dollar did 10 years ago.
Historical US Inflation Rates
| Period | Average Annual Inflation | Cumulative |
|---|---|---|
| Last 10 years (2014-2024) | 2.9% | 33% |
| Last 20 years (2004-2024) | 2.6% | 67% |
| Last 30 years (1994-2024) | 2.5% | 108% |
| Last 50 years (1974-2024) | 3.9% | 565% |
The Impact of Inflation
- Savings erosion: Money sitting in low-interest accounts loses value over time
- Retirement planning: You'll need more money to maintain your lifestyle
- Investment returns: Real returns = nominal returns minus inflation
- Fixed incomes: Pensions and annuities lose purchasing power
- Debt advantage: Fixed-rate debts become easier to pay over time
How to Protect Against Inflation
- Invest in stocks, which historically outpace inflation
- Consider Treasury Inflation-Protected Securities (TIPS)
- Real estate often appreciates with inflation
- I-Bonds provide inflation-adjusted returns
- Avoid holding too much cash long-term
Frequently Asked Questions
What causes inflation?
Inflation is caused by increased money supply, rising production costs, strong consumer demand, or supply chain disruptions. Central banks try to maintain low, stable inflation (typically around 2%).
What is a good inflation rate?
Most economists consider 2% annual inflation healthy for economic growth. Higher rates (above 4-5%) can destabilize the economy, while deflation (negative inflation) can be even more damaging.
How is inflation measured?
Inflation is typically measured using the Consumer Price Index (CPI), which tracks the price of a basket of common goods and services. Core CPI excludes volatile food and energy prices.
What's the difference between real and nominal returns?
Nominal returns are your actual investment gains. Real returns are nominal returns minus inflation. If you earn 7% but inflation is 3%, your real return is only 4%.
How does inflation affect retirement savings?
At 3% inflation, prices double every 24 years. If you retire at 65 and live to 89, you'll need twice as much money at the end of retirement to buy the same things.
Can inflation ever be stopped or reversed?
Inflation can be slowed through monetary policy (raising interest rates) or fiscal policy (reducing government spending). Deflation (negative inflation) is rare and often signals economic problems. Central banks aim for low, stable inflation rather than zero.
How do central banks control inflation?
The Federal Reserve raises interest rates to combat inflation, making borrowing more expensive and slowing economic activity. They can also reduce the money supply by selling bonds. These tools take 12-18 months to fully impact inflation.
What's the difference between inflation and hyperinflation?
Inflation is a gradual price increase (2-10% annually). Hyperinflation is extremely rapid inflation (50%+ per month), destroying currency value. Examples include Zimbabwe (2008) and Venezuela (2016-2020). Hyperinflation typically requires government intervention and currency reform.
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