Inflation Calculator
This inflation calculator computes the change in buying power over time. You can choose to calculate inflation based on U.S. CPI data or provide an average annual rate for the calculation. If the second year is later than the first year, it is a forward calculation. Otherwise, it is a backward calculation. To use the calculator, please provide the monetary amount, the relevant years, select/fill in the desired inflation data, then click the "Calculate" button.
What is Inflation?
Inflation describes the price increases, or how buying power of money declines, over time. It's most often expressed as a percentage to identify the rate of change in a specified time period.
Inflation contrasts with deflation, which is when prices decline and buying power of money increases over time.
How to Measure Inflation
Generally, inflation aims to measure the average rate of price changes in an economy. To do so, economists rely on the Consumer Price Index, or CPI.
The CPI in the U.S is calculated monthly by the Bureau of Labor Statistics (BLS) and represents the headline inflation number. This index tracks inflation by measuring how the price of a basket of common goods and services changes over time. This "basket" includes items like groceries, energy costs, transportation, and medical care.
To measure CPI, the BLS identifies the average price of each item in the basket using household surveys. Then, these values are weighted based on their significance to the average person's budget. The percentage change in CPI over a set time frame represents the overall rate of inflation.
The Producer Price Index
You can also view inflation through the lens of the Producer Price Index (PPI). The PPI is a whole group of indexes that measures how prices change at the producer-level. (For instance, how much a grain factory pays for corn or wheat.)
Since producer prices influence what consumers pay at the store, PPI data can indicate the direction of future consumer-level inflation.
How to Calculate the Change in Buying Power (Inflation)
You can use changes in the CPI or PPI to calculate the change in buying power using the following formula:
| Inflation = |
|
× 100% |
For instance, let's say that you want to know how the purchasing power of $100 changed after 20 years, between 2000 and 2020.
The CPI value for 2000 is 172.2 (initial value), while the CPI value for 2020 is 258.8 (final value).
Plugging these numbers into the above equation looks like this:
| Inflation = |
|
× 100% = 150.3% |
Then, to find out how much the cost of $100 changes, you'd multiply the dollar amount by the inflation rate, remembering to divide the inflation rate by 100% to convert it into a decimal:
Change in buying power = $100 × 1.503 = $150.30
In other words, $100 in the year 2000 is equivalent to $150.30 in the year 2020.
The ability to calculate the change in buying power on your own using this equation is a valuable skill. That said, our inflation calculator makes calculating inflation even easier.
How the Inflation Calculator Works
The calculator computes the change in buying power over time using either CPI data or user-entered inflation rates. To use the calculator, just provide the monetary value, relevant years, and desired inflation rate, then, hit "Calculate"!
(Bear in mind that you can measure either forward- or backward-looking inflation. If the second year is later than the first year (for instance, 2004 and 2024), you're making a forward calculation. But if the second year is earlier than the first year (for instance, 2024 and 2004), you're making a backward calculation).
From there, our inflation calculator will tell you how buying power changes over time for your selected data. It will also provide the cumulative inflation rate over the entire period and average annual inflation rates. The graph displays the growth in values so you can visualize changes over time.
A Quick Example Using CPI Data
For instance, let's say you want to calculate the change in buying power of $100 between 2000 and 2020.
You'll start by entering $100 in the dollar box, 2000 in the first year box, and 2020 in the second. Then, you'll select "U.S. CPI data" to use federal inflation data.
$100 in 2000 has the same buying power as $153 in 2020. On average, every year prices increased 2.15% and inflation was up 53% over the entire period.
Calculating Back in Time
You can also use our inflation calculator to determine how buying power has changed historically.
Say that you want to know how much money you'd need in 2000 to equal $100 in 2022.
The steps are almost the same as the calculation above: enter $100 in the dollar box and use U.S. CPI data. But this time, the first year box will read 2020, while the second will read 2000.
Since we only switched years, your inflation rate will remain constant. Purchasing $100 of goods and services in 2022 would be roughly equivalent to $65.36 of goods and services in 2000.
Entering Your Own Data
You can also enter your own data for both backward- and forward-looking calculations.
For instance, say you want to see how much $100 in 2030 will be worth in the year 2050.
Start by entering $100 in the dollar box, then set the year boxes to 2030 and 2050. Also, because there's no federal CPI data for the future, you'll have to provide your own average inflation rate. For example, you can plug in 3% if you think inflation will be similar to the previous 100 years in the future.
$100 in 2030 has the same buying power as $180.61 in 2050. That means you'll need to mentally prepare for $100 worth of items in 2030 to cost 80.61% more in 2050.
What is the Target Inflation Rate?
Many economists agree that inflation is a natural function of modern society that helps propels economic growth. In line with those goals, most economists and central banks agree that inflation should remain within a healthy target range.
Too little inflation, and the economy may stagnate or even slip into a recession; too much, and the economy may overheat as price hikes continue to eat into budgets. That's why the U.S. Federal Reserve attempts to keep inflation around 2%. That's just warm enough to maintain growth, but not so hot that the economy speeds ahead dangerously.
Causes of Inflation
The root cause of inflation is often described as an increase in demand or the broader money supply. Either can happen by three basic mechanisms.
Demand-Pull Inflation
Demand-pull inflation occurs when the demand for goods and services in an economy rises. As demand goes up, it "pulls" inflation with it.
Often, demand-pull inflation is attributed to an increase in the supply of money and credit in an economy. When people have more money, consumer sentiment rises, which drives higher spending. Over time, this higher demand leads to higher prices.
Cost-Push Inflation
Cost-push inflation occurs when the prices for producing or buying raw and intermediate goods rise – think raw cotton or cotton thread. As the cost of intermediate goods rises, it "pushes" the price of the final product higher.
High production costs may be attributable to natural disasters or geopolitical events that threaten supplies, like a mine collapse or oil sanctions. Higher business costs (for instance, due to increased electricity prices) can also contribute to higher inflation.
Built-in Inflation
Built-in inflation occurs when people expect current inflation rates to continue for the foreseeable future. When people believe inflation will continue, they may ask for higher wages to maintain their standard of living. This can cause businesses to raise prices to dilute increased payroll costs, leading to a vicious "wage-price spiral."
Planning For Inflation
Knowing how inflation impacts your finances now (and how it could in the future) can provide some powerful insights.
As inflation rises, one unit of currency buys less than it used to. That means that the amount of money you make now likely won't be able to support your current quality of life in the future. As such, being able to calculate how far your current wages will stretch in the future can help you budget long-term.
Alternatively, you could use the calculator to see how much money you'd need in the future to meet your same standard of living.
For example, say you make $50,000 per year right now and predict that annual inflation will rise 3% on average in the next 10 years. According to the calculator, you'd need to earn $67,195.82 10 years later to enjoy the same standard of living today.
Similar calculations also come in handy when you're looking forward to retirement. Of course, it's difficult to predict exactly how inflation will change your buying power decades in the future. But having a rough idea can help you make smart saving and investing decisions to ensure your golden years are well-funded.