Definition
Inflation is the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. For example, if the inflation rate is 3%, a $100 item today will cost $103 next year. This calculator helps you understand how inflation erodes the value of money over time.
Formula
Present Value (PV) = FV / (1 + i)n
Where:
PV = Present value (amount today)
FV = Future value (amount in the future)
i = Annual inflation rate (as a decimal)
n = Number of years
Example
Future Value: If you have $1,000 today and inflation averages 3% per year for 10 years, the future value (what you would need to have the same purchasing power) is:
FV = $1,000 × (1 + 0.03)10 = $1,343.92.
Present Value: If you expect to receive $1,000 in 10 years and inflation is 3%, that money's present value (what it's worth today) is:
PV = $1,000 / (1 + 0.03)10 = $744.09.
Frequently Asked Questions
❓ What is a typical inflation rate?
Central banks often target 2% annual inflation. Historically, inflation in the U.S. has averaged around 3% over the long term, but it can vary significantly.
❓ How does inflation affect my savings?
If your savings earn less interest than the inflation rate, your purchasing power declines. For example, with 3% inflation and 1% savings interest, you effectively lose 2% in real value each year.
❓ Can I use this calculator for historical inflation?
Yes, you can enter historical inflation rates to see what a past amount would be worth today (Present Value mode). For precise historical data, refer to CPI indices.
❓ What is the difference between Future Value and Present Value modes?
Future Value shows how much a given amount today will be worth in the future after inflation. Present Value shows how much a future amount is worth in today's money.