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What Is Inflation? How It Erodes Purchasing Power
By Utilix Editorial Team · Published May 31, 2026
What Is Inflation? How It Erodes Purchasing Power Over Time
Inflation is the rate at which prices for goods and services rise over time — and equivalently, the rate at which the purchasing power of money falls. If inflation runs at 3% per year, something that costs $100 today will cost $103 in a year and roughly $180 in 20 years.
How Inflation Is Measured
Two indexes dominate:
| Index | What it tracks | Who uses it |
|---|---|---|
| CPI-U (Consumer Price Index) | Basket of goods and services for urban consumers | US government, Social Security adjustments |
| PCE (Personal Consumption Expenditures) | Broader spending patterns, chain-weighted | Federal Reserve's preferred measure |
| Core CPI / Core PCE | Excludes food and energy (volatile) | Policy analysis, stripping noise |
CPI is the most commonly cited. When someone says "inflation is 4%," they almost always mean CPI-U year-over-year change.
The Purchasing Power Formula
To find what today's dollars are worth in the future — or what past dollars are worth today:
Future value = Present value × (1 + inflation rate)^years
Present value = Future value ÷ (1 + inflation rate)^years
Example: You have $50,000 in savings. At 3% annual inflation:
- In 10 years it buys what $37,200 buys today.
- In 20 years it buys what $27,700 buys today.
The money hasn't gone anywhere — but its purchasing power has nearly halved.
Use the Inflation Calculator to enter any amount and see its real value across any number of years.
Historical US Inflation Rates
| Decade | Average annual CPI |
|---|---|
| 1970s | ~7.4% (energy shocks) |
| 1980s | ~5.6% (disinflation) |
| 1990s | ~3.0% |
| 2000s | ~2.6% |
| 2010s | ~1.8% |
| 2020–2022 | ~5.4% (post-pandemic spike) |
| 2023–2024 | ~3.2% (cooling) |
The long-run US average is roughly 3%. Planning tools typically use 2–3% as a base assumption.
Why Inflation Matters for Savings and Investments
A savings account earning 1% APY when inflation is 4% has a real return of −3%. You're earning nominal interest but losing real purchasing power every year.
Real return = Nominal return − Inflation rate
This is why long-term financial planning uses real returns, not nominal ones. A retirement calculator that ignores inflation systematically overstates future wealth. The Retirement Savings Calculator lets you set an expected inflation rate to model the gap.
How Inflation Affects Different Assets
| Asset | Inflation behaviour |
|---|---|
| Cash / savings account | Loses real value if yield < inflation |
| Bonds (fixed rate) | Real return falls as inflation rises |
| TIPS / I-bonds | Principal adjusts with CPI — explicit inflation hedge |
| Equities | Historically outpace inflation over long periods |
| Real estate | Often tracks or exceeds CPI; rent follows prices |
| Commodities | Historically correlated with inflation spikes |
Inflation and Your Savings Goal
If you're saving toward a target — a house down payment, an emergency fund, a college fund — you need to inflate that target forward, not just divide by months. A $30,000 goal today becomes a ~$40,300 goal in 10 years at 3% inflation.
The Savings Goal Calculator accounts for this when you set your target date.
What the Inflation Calculator Shows
The Inflation Calculator answers three questions:
- Future equivalent — what a today's dollar amount costs in N years at a given rate.
- Past equivalent — what a historical amount equals in today's money.
- Rate needed — what inflation rate connects two amounts over a period.
It also shows the year-by-year real value erosion so you can see the compounding effect visually rather than as a single number.