Inflation Calculator

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Inflation is the increase in the prices of goods and services across an economy. When prices inflate, you need more money to buy the same things. The opposite of inflation is deflation, when prices become lower across a range of goods and services. Inflation is an important concept for investors to understand because it eats into your returns on your investments.

The Inflation Rate Defined

To measure the inflation rate, you cant just take a single good and measure how its price changes. You have to look at whats called a basket of goods and services. In the U.S., inflation rates come from the Consumer Price Index (CPI). The CPI takes what the government considers a representative basket of goods and services and records changes in their prices from month to month and year to year.

Historical Inflation Rates

While many countries have battled inflation and even hyperinflation in the past 120 years or so, the U.S. has largely avoided that fate. Average annual inflation in the U.S. between 1913 and 2019 was 3.10%.

If you look at a table containing the inflation rate from 1915 to 2019, youll notice deflation (expressed as a negative inflation percentage) during the Great Depression. Youll also notice significant inflation in the 70s and early 80s. In general, though, the Federal Reserve moderates inflation to keep it around the 2% mark. In other words, you dont need to worry that youll be carrying suitcases full of dollar bills to the grocery store any time soon.

One of the privileges of living in a developed country in this day and age is a certain amount of confidence that inflation rates will stay within a reasonable range. The inflation rate from 2017 to 2018 was just 2.44%.

How Inflation Impacts You

If your income stays the same while prices go up, youll feel the effects of inflation. Your money wont stretch as far and youll have to make some changes to your budget. In theory, salaries and wages should rise to keep up with inflation so that workers can maintain their standard of living. Social Security benefits, too, are subject to Cost of Living Adjustments (COLAs) that take rising prices into account.

If your income rises by the same percentage as the inflation rate, your purchasing power is not diminished. It doesnt grow or shrink. If your income rises by a percentage greater than the inflation rate, youll be able to afford more goods and services. This is the scenario most of us want. It makes us feel better to see our purchasing power growing over time.

Of course, if your income shrinks or disappears, you might be in trouble. Other people who feel the negative effects of inflation are those on a fixed income, or those who hold fixed-income investments while inflation takes its toll on their purchasing power.

For example, if you buy a fixed-income security like a CD with a 2% yield and inflation rises to 4%, youre losing money. In an environment where interest rates are low, it can be tough to beat inflation without buying stocks. Bonds, CDs and savings accounts will keep your principal intact but wont necessarily grow enough to keep pace with inflation. That means youre less likely to meet your retirement savings goals. Fortunately, an inflation calculator can help you figure out a target for your retirement investments in future dollars.

Although stocks bring risk and volatility, they also have a track record of providing inflation-beating returns over time. Investing in stocks not only helps you grow your retirement savings, but it also helps your retirement savings last throughout your entire retirement. Its important to have enough retirement savings that you wont be up all night worrying about inflation.

Once youre retired and out of the workforce, if your retirement nest egg isnt growing, theres not much you can do to preserve your purchasing power if inflation hits. Thats why our retirement calculator takes inflation into account when figuring out how much you should save for your golden years.

Get Real

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When you see the word real used in relation to finance, it means adjusted for inflation. So if you hear that real wages arent rising, it means that wages arent rising above inflation. Same with the real increase in home prices over time. Theres often a big difference between what you see before and after adjusting for inflation.

An inflation calculator shows you the value of the same sum of money at different times in the past and the future. It can tell you about historic prices and future inflation. Estimates of future prices and values are usually based on projections using the average inflation rate - essentially an expected inflation calculator.

Wondering how to calculate the inflation rate in a given year? The CPI helps, but it only goes as far back as 1913. To find the historic inflation rate in, say, 1800, analysts take a current price index and then subtract a comparable price index based on data from 1800. They then divide that number by the 1800 index and multiply by 100 to get a percent. The formula for calculating inflation is: (Price Index Year 2-Price Index Year 1)/Price Index Year 1*100 = Inflation rate in Year 1.

As we mentioned, future inflation calculators generally base their projections on recent averages. In the U.S., where inflation volatility hasnt been a problem lately, its pretty safe to assume that future inflation will hover around 2.50%. A future inflation calculator lets you see how many future dollars will equal a certain number of todays dollars. Sometimes you can even adjust the inflation rate to see what would happen to your purchasing power if there were extreme inflation or deflation.

Bottom Line

If your investments arent providing returns equal to or greater than the inflation rate, youre probably in trouble. Youll find yourself making tough choices about what you can afford as inflation eats into your purchasing power. In other words, investors should count on inflation and plan accordingly.

Preparing for retirement by stashing your savings under your mattress wont cut it if you want to maintain or improve your standard of living. You should consider all investments, among other things, based on their ability to provide inflation-beating gains. The fact that Social Security benefits automatically adjust for inflation is part of what makes them such a powerful resource for retirees. Now that you know about inflation, you can start working on strategies for beating it.

Places with the Least Inflation

SmartAsset’s interactive map highlights the places across the country that have experienced the least inflation over the past decade. Zoom between states and the national map to see the places that have been the most resistant to inflation over ten years.

Rank Urban Area Change in Purchasing Power Avg. Change in Cost of Living Avg. Change in Personal Income

Methodology We determined the cost of living for each location by looking at the price for a basket of goods. The goods included basics like milk, shampoo and rent. We did this for both 2007 and 2017. We also calculated the average per capita personal income for each city for both years.

To figure out how far money would go in each city, we calculated purchasing power. We divided the average per capita income by the cost of living in each city for both 2007 and 2017. The change in purchasing power from 2007 to 2017 then shows us the metro areas in the country that have seen the least inflation over the past decade.

Sources: Council for Community and Economic Research, Bureau of Economic Analysis

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