What inflation actually measures
Inflation is the rate at which the general price level rises, which means the same money buys less. It is measured with a price index — the US uses the Consumer Price Index, which tracks a fixed basket of goods and services weighted by how households actually spend.
- CPI
- Consumer Price Index for the year in question
For forward projection at a fixed rate, it is straightforward compounding:
Future purchasing power = Amount ÷ (1 + rate)years
Why moderate inflation matters so much
Inflation compounds, and the effect over a working life is larger than most people expect. At 3% a year, prices double roughly every 24 years.
| Years | At 2% | At 3% | At 5% |
|---|---|---|---|
| 5 | $90.57 | $86.26 | $78.35 |
| 10 | $82.03 | $74.41 | $61.39 |
| 20 | $67.30 | $55.37 | $37.69 |
| 30 | $55.21 | $41.20 | $23.14 |
| 40 | $45.29 | $30.66 | $14.20 |
This is the strongest argument against holding long-term savings in cash. A savings account paying 1% while inflation runs at 3% loses 2% of purchasing power every year, even as the nominal balance grows.
The Rule of 70
Divide 70 by the inflation rate to find how many years until prices double. At 2% that is 35 years; at 3%, about 23; at 7%, ten years. It is the same arithmetic as the Rule of 72 for investment returns, applied to the other direction.
Inflation in historical context
| Decade | Average | Context |
|---|---|---|
| 1930s | −2.1% | Deflation during the Great Depression |
| 1940s | 5.6% | Wartime controls, then a post-war surge |
| 1950s | 2.1% | Stable post-war growth |
| 1960s | 2.3% | Low until the late-decade rise |
| 1970s | 7.1% | Oil shocks and wage-price spirals |
| 1980s | 5.6% | Volcker rate rises brought it down |
| 1990s | 3.0% | The Great Moderation |
| 2000s | 2.6% | Stable, then the financial crisis |
| 2010s | 1.8% | Persistently below the Fed target |
| 2020s | ~4.0% | Pandemic disruption and the 2022 surge |
Most central banks target around 2%. The reasoning is that mild inflation is easier to manage than deflation — falling prices encourage people to delay purchases, which deepens downturns, and they make debt harder to repay in real terms.
Protecting against it
- Equities. Over long periods, stocks have outpaced inflation by roughly 6–7% a year, because companies raise prices along with everyone else.
- Inflation-linked bonds. TIPS in the US, index-linked gilts in the UK — the principal adjusts with the index.
- Property. Rents and values tend to track inflation over long periods, though with substantial regional variation.
- Fixed-rate debt. Inflation erodes what you owe in real terms. A 30-year fixed mortgage becomes cheaper in real money every year.
- Not cash. Beyond an emergency fund, cash guarantees a real loss whenever inflation exceeds the interest rate.
When projecting anything long-term, work in real terms. The investment calculator and the retirement calculator both show inflation-adjusted figures alongside nominal ones for exactly this reason.
Frequently asked questions
How do I calculate the inflation-adjusted value of money?
Multiply the amount by the ratio of the two years' CPI values. $100 in 2000 with a CPI of 172.2, compared with 2024 at about 313.7, is 100 × 313.7 ÷ 172.2 = $182.17.
For a projection at a fixed rate instead, multiply by (1 + rate) raised to the number of years.
How long until prices double?
Divide 70 by the inflation rate. At 2% that is 35 years, at 3% about 23 years, and at 7% ten years.
This is the Rule of 70 — the same arithmetic as the Rule of 72 used for investment doubling.
Why does the government target 2% inflation?
Because mild inflation is safer than deflation. Falling prices lead people to delay purchases, which deepens recessions, and they increase the real burden of debt.
A small positive rate also gives central banks room to cut real rates during a downturn.
Is my personal inflation rate the same as CPI?
Almost certainly not. CPI is a national average across a fixed basket. If rent, childcare or medical care dominate your spending, your rate is likely higher, since those have outpaced the index.
Homeowners with fixed mortgages often experience lower personal inflation than renters.
What is the difference between inflation and deflation?
Inflation is rising prices, so money buys less. Deflation is falling prices, so money buys more.
Deflation sounds appealing but is economically damaging — it encourages people to postpone spending, which reduces demand and can become self-reinforcing.