What Inflation Does to Your Savings (With a Calculator)

Inflation is a general rise in prices over time. It means the same amount of money buys less in the future than it does today. That matters most for money you plan to keep for years.

How inflation is measured

In the United States, one of the most widely cited measures is the Consumer Price Index (CPI), published by the Bureau of Labor Statistics. It tracks the prices of a basket of goods and services that households buy. You can find current data at bls.gov/cpi. This article uses hypothetical rates because the actual rate changes from year to year.

The formula

With a hypothetical 3% a year, here is what $1,000 could buy in today's dollars, and what an item that costs $100 today could cost:

In other words, at 3% a year, $1,000 kept for 20 years would buy what about $554 buys today. Try other rates:

Your "real" return

A savings rate only tells part of the story. What matters for buying power is the rate after inflation, the real return:

Example: money earning a hypothetical 5% while inflation is 3% has a real return of 1.05 ÷ 1.03 − 1 = 1.94%. If the account pays less than inflation, your balance grows in dollars but shrinks in what it can buy. If it pays more, your buying power grows.

What this means in practice

• Cash is for short-term needs. Your emergency fund is meant to be safe and available, not to beat inflation. See how much to keep in an emergency fund.
• Long-term goals need growth to be considered. Money you won't need for many years faces inflation for longer. How to invest for that depends on your goals and risk tolerance, and it's worth discussing with a qualified professional. Investments can lose value.
• Compare rates on the same basis. Use APY for savings. See APR vs. APY.
• Plan with inflation in mind. A goal of "$50,000 in 20 years" will buy less than $50,000 buys today. See how compound interest works to estimate growth.
• Debt can benefit from inflation, but not always. Fixed-rate debt gets easier to repay in real terms if your income rises with prices. Variable-rate debt and credit cards don't work that way.