Convert between today's dollars and future dollars to see the real cost of inflation.
Inflation is a silent tax on cash. At 3% average inflation, $10,000 held as cash for 20 years loses roughly 45% of its purchasing power. It will still be $10,000 on paper, but it will buy what about $5,537 buys today. Nobody takes money from your account; the money simply buys less each year.
This is the core reason long-term savings belong in assets that grow faster than inflation, such as diversified investments, rather than low-interest accounts.
Where i is the annual inflation rate and n is the number of years.
US inflation averaged roughly 3.1% per year from 1926 through recent decades, but the ride was bumpy: near zero in 2015, briefly above 9% in 2022. Long-run planning should use a range of 2.5% to 3.5% rather than a single point estimate. Note that official indexes track an average basket; your personal inflation rate depends on what you actually buy, and categories like healthcare and education have historically outpaced the average.
Nomial return is the headline number. Real return subtracts inflation. A 7% nominal return with 3% inflation is roughly a 3.9% real return. Real return is what matters for purchasing power.
Divide 72 by the inflation rate to estimate how quickly prices double. At 3.6% inflation, prices double about every 20 years. It is an approximation of exponential growth that happens to be accurate for common rate ranges.
Most central banks target around 2% per year as a sign of a healthy economy. Deflation, where prices fall, is historically associated with recessions and is considered more dangerous than mild inflation.