Inflation Calculator

Inflation is the one cost that arrives without anyone deciding anything. On the defaults, 100,000 held at 3% inflation for twenty years has the purchasing power of 55,367.58 in today's money. That is 44,632.42 gone, 44.63% of the original, from a sum that never moved.

Real and nominal answer different questions

Nominal figures are what a statement says; real figures are what the money buys. A pension projected to reach 500,000 in thirty years is a nominal number, and at 2.5% inflation across the same period it buys what 238,371 buys today. Neither figure is wrong and both answer a question, but they answer different ones, and mixing them is the standard way a long plan flatters itself: nominal investment returns set against expenses quoted in today's prices.

Compounding runs in this direction too

At 2.5% a year prices double in about 28 years, at 3.5% in about 20, and at 5% in about 14. Dividing 72 by the rate lands within a year of each of those, which is a usable shortcut at rates of this size. Over a 40-year horizon at 2.5%, prices end up 2.69 times today's, so a plan written in today's units understates what the same life costs later.

The rate itself carries the uncertainty. On the twenty-year default, 2% leaves 67,297.13 and 4% leaves 45,638.69, against 55,367.58 at 3%. One percentage point either side moves the answer by around ten thousand on a hundred thousand, which is why running the calculation at a range rather than a point tells you more.

The headline rate is not your rate

Headline inflation is an average, and Kaplan and Schulhofer-Wohl put a number on how wide the spread around it is. Using scanner data on individual households, they found an annual interquartile range of household inflation rates of 6.2 to 9.0 percentage points, with lower-income households experiencing higher inflation. Their more surprising finding is where the difference comes from: most of it is not different households buying different baskets, but different households paying different prices for the same types of goods.

Where the rate comes from

The measured rate comes from a consumer price index: a basket of goods and services weighted by household spending, re-priced regularly and re-weighted as spending patterns change. What goes in the basket, how it is weighted and how the average is taken all differ between countries, so a rate lifted from one economy does not describe another. Consumer price inflation by country is published in the World Bank's open data, and national statistics offices publish the detail behind each series.

What the tool cannot do

One constant rate, applied to everything. There is no deflation path, no volatility around the average, no product-specific rates and no view of a particular household's basket. It measures erosion and says nothing about what to hold against it, which is a separate question with a separate answer for every situation.