Calculate Inflation Impact
Today's Value
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Future Cost
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Purchasing Power Lost
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| Year | Future Cost | Purchasing Power of Original Amount |
|---|
What is Inflation?
Inflation is the rate at which prices for goods and services rise over time, reducing the purchasing power of your money. If inflation is 6% per year, something that costs ₹100 today will cost ₹106 next year.
The Inflation Formula
Future Cost = Present Cost × (1 + Inflation Rate)Years
For purchasing power: how much today's money will be worth in the future:
Future Purchasing Power = Present Amount ÷ (1 + Inflation Rate)Years
The Rule of 72
A quick way to estimate how long it takes for prices to double:
Years to Double = 72 ÷ Inflation Rate (%)
| Inflation Rate | Prices Double In |
|---|---|
| 3% | 24 years |
| 4% | 18 years |
| 5% | 14.4 years |
| 6% | 12 years |
| 7% | 10.3 years |
| 8% | 9 years |
How to Beat Inflation
- Equity investments — Stock markets have historically returned 10-15% annually, well above inflation
- Real estate — Property values generally rise with or above inflation
- Gold — A traditional inflation hedge, especially in India
- Inflation-indexed bonds — TIPS (US), IIBs (India) adjust returns for inflation
- Avoid excess cash — Savings accounts earning 3-4% lose value at 6% inflation
Real-World Inflation Examples
| Item | Price 20 Years Ago | Price Today (Approx) | Increase |
|---|---|---|---|
| 1L Milk (India) | ₹14 | ₹60 | 4.3× |
| Gold (10g, India) | ₹5,600 | ₹75,000+ | 13× |
| Movie Ticket (India) | ₹50 | ₹250 | 5× |
| Gallon of Gas (US) | $1.50 | $3.50 | 2.3× |
| College Tuition (US, avg) | $8,000 | $25,000+ | 3× |
Frequently Asked Questions
Inflation is the rate at which the general level of prices rises over time, reducing what your money can buy. It's measured by indices like the Consumer Price Index (CPI).
If your savings earn less than the inflation rate, your money loses real value. ₹10 lakh earning 4% in a savings account effectively shrinks if inflation is 6% — you're losing 2% purchasing power annually.
Most central banks target 2-4% inflation. The RBI targets 4% (±2%), the US Fed targets 2%. Moderate inflation is healthy for growth; deflation and hyperinflation are both harmful.
Nominal return is the stated return before inflation. Real return ≈ Nominal return − Inflation. More precisely: Real Return = ((1 + Nominal) / (1 + Inflation)) − 1. A 12% return at 6% inflation gives ~5.66% real return.
Key causes: demand-pull (too much money chasing too few goods), cost-push (rising raw material and labor costs), monetary expansion (central banks increasing money supply), and supply chain disruptions.
Invest in assets that historically beat inflation: equity mutual funds, real estate, gold, and inflation-indexed bonds (TIPS/IIBs). Avoid holding large amounts in savings accounts or cash.
Divide 72 by the inflation rate to estimate how many years it takes for prices to double. At 6% inflation: 72 ÷ 6 = 12 years for prices to double.
No. Fixed-income earners and retirees are hit hardest. Borrowers benefit (repay loans with cheaper money). Asset owners benefit as property and stock values tend to rise with inflation.
India's CPI inflation has averaged 5-6% in recent years. The RBI targets 4% with a tolerance band of 2-6%. Food inflation can be higher at 6-10% in some years.
Deflation is a sustained decrease in the general price level. While lower prices sound good, deflation can lead to reduced spending, lower wages, higher real debt burden, and economic recession. Japan experienced deflation for decades.