Inflation Calculator

About the Inflation Calculator

What money is worth at a different point in time, forwards or backwards.

The arithmetic is one line. What makes an inflation calculator worth having is the two things almost everybody gets wrong about it — and the second is usually the question people actually arrived with.

Inflation does not add up. Thirty years at 3% is not 90%.

A pay rise below inflation is a pay cut, and the size of it is not the difference between the two percentages either.

How to Use the Inflation Calculator

What will this cost? takes an amount today and shows what it will cost after a period of inflation.

What is this worth today? goes the other way — a future or past amount, in today's spending power.

Did my pay rise beat inflation? compares a rise against an inflation rate and gives the real change.

Step-by-Step Example

£50,000 of spending, 30 years, 3% inflation.

  50,000 × (1 + 3%)³⁰  =  121,363.12

What costs £50,000 today will cost £121,363.12 in thirty years. Prices rise by £71,363.12, which is 142.73% in total.

Not 90%.

Why It Is Not 3 × 30

Multiplying the rate by the years is the intuitive move and it is wrong, because each year's inflation applies to prices that have already risen.

At five years the gap is small enough to ignore. At thirty it is more than half the answer again, and the shortcut understates every long-horizon figure.

Going Backwards

The same formula, divided rather than multiplied:

  50,000 ÷ (1 + 3%)³⁰  =  20,599.34

£50,000 arriving in thirty years has the spending power of £20,599.34 today. £29,400.66 — 58.8% of it — is lost to inflation.

This is the conversion that matters for any long-dated amount: a pension projection, a savings target, a price quoted years out. A sum in future money compared against today's prices is the single most common way a financial plan flatters itself.

Did Your Pay Rise Beat Inflation?

This is the question most people arrive with, and it is almost never offered.

£45,000 salary, a 3% rise, 4% inflation:

  What you got:     45,000 × 1.03  =  46,350.00
  What you needed:  45,000 × 1.04  =  46,800.00
                                       ────────
  Behind by:                             450.00 a year

A real cut of 0.96%, on a payslip where the number went up.

That is the whole difficulty with inflation as a pay issue: nothing visible went backwards. The rise happened, it was announced, it appeared in the pay packet. The loss is entirely in what the money buys.

Why 0.96% and not 1%

Subtracting the rates gives −1%. The correct calculation divides:

  (1 + 3%) ÷ (1 + 4%) − 1  =  −0.96%

At these numbers the shortcut is close. At 12% against 15% the gap is wider, and it widens as the rates rise — which is exactly when people most need the figure.

What Rate Should You Use?

Central bank targets in developed economies are usually around 2%, and long-run averages tend to run a little above. The default here is 3%, which is mildly cautious.

Beyond about twenty years the rate is doing more work than any other input. A thirty-year figure at a single assumed rate is an illustration, not a forecast — inflation has run from negative to double digits within living memory, and no thirty-year period has resembled its own average closely.

Run it a point higher and a point lower. If the decision changes, the decision was never robust.

Deflation

A negative rate is handled rather than refused. Money gains purchasing power instead of losing it, and the arithmetic is identical.

It is rarer than inflation and generally worse for an economy — falling prices give people a reason to postpone spending, which reduces demand, which pushes prices down further. But it is a real case, not an input error.

Understanding Your Result

The answer is the converted amount or the real change.

What it means puts it in plain terms.

The difference is what was gained or lost.

Why it is not the simple version shows the compounding against the additive shortcut.

Worth knowing covers the caveat that applies — a long horizon resting on one assumed rate, a deflation case, or what a below-inflation rise really means.

When Should You Use This Calculator?

On any long-dated figure. Pension projections, savings goals, future prices.

When you get a pay rise. Check it against inflation before deciding how you feel about it.

When comparing a past amount to today. "My first salary was £12,000" means very little without conversion.

Before judging a savings return. A 4% return against 4% inflation is a 0% real return.

Common Mistakes

Multiplying the rate by the years. It understates badly over long periods.

Subtracting inflation from a pay rise. Divide. The error grows with the rates.

Treating one assumed rate as a forecast over decades. It is an illustration.

Comparing future money to today's prices. Convert first, then judge.

Assuming a nominal return is a real one. The savings calculator does that conversion and takes tax off as well.

Using headline inflation for your own situation. The published figure is a basket average. If your spending is concentrated in housing or energy, your personal rate may be quite different.

Forgetting it applies to debts too. Inflation erodes the real value of a fixed-rate debt in exactly the same way it erodes savings — which is the one place it works in your favour.

Every figure here is an estimate for planning. Inflation varies considerably and this is not financial advice.