What inflation actually does
Inflation does not take money out of your account. It does something subtler and, over a lifetime, more expensive: it leaves the number alone while quietly shrinking what the number buys.
Ten thousand under the mattress is still ten thousand in twenty years. At 3% average inflation it buys what about 5,500 buys today. Nobody stole anything. You simply lost 45% of it.
Run the same formula the other way and you get the other half of the picture — what you would need in future money to buy today's basket:
The rule of 70
A shortcut worth memorising: divide 70 by the inflation rate and you get roughly the number of years for money to lose half its value. At 2% that is 35 years. At 3.5%, twenty. At 7%, a decade.
It is the same arithmetic as the rule of 72 used for compound growth — just pointed in the unpleasant direction.
Nominal return versus real return
This is the distinction that decides whether saving is actually working. A savings account paying 2% while inflation runs at 3% is not earning you 2%. It is losing you about 1% a year in purchasing power, dependably, while the balance goes up and feels like progress.
Fill in the optional interest field above and the calculator shows both: what the balance says, and what it is worth. The gap between those two lines is the entire argument for investing money you will not need for a decade.
Your personal inflation rate is not the headline one. The published figure is an average across a basket of everything. If most of your money goes on rent, childcare or healthcare — categories that have risen faster than the average in many countries — your real rate is higher. If you own your home outright and mostly buy goods, it may be lower. Try a rate a point above the headline to see how sensitive the result is.
What to do about it
- Do not hold years of cash. Keep your emergency fund liquid and accept that it loses a little value — that is the price of instant access. Beyond that, cash is a slow leak.
- Get the best rate available on the cash you do hold. The difference between a 0.1% account and a 4% one is not a rounding error over five years.
- Index long goals to inflation. A house deposit target set today will be wrong by the time you get there. Add your inflation assumption to the goal when you plan it in the savings goal calculator.
- Remember your salary too. A pay rise below inflation is a pay cut. It just does not feel like one.
A note on how this is calculated
This calculator uses an assumed average rate that you control, compounded annually — not a historical price index. That makes it useful for planning ahead, where no index exists yet, and honest about being an estimate. For exact historical comparisons between two specific years, use your national statistics office: the US Bureau of Labor Statistics, the UK Office for National Statistics, or Eurostat.