Inflation is the steady rise in prices that erodes what money can buy. It compounds exactly like interest: a constant annual rate stacks on an ever-larger base, so the effect over decades is far bigger than the yearly figure suggests. Two views tell the story — future cost = amount × (1 + rate)^years (how much more you'll need) and its reciprocal, buying power = amount ÷ (1 + rate)^years (what your cash will be worth). The practical takeaway: idle money loses value, so savings must earn a real return above inflation.
Reviewed: June 20, 2026 · Author: Naveen P N, Founder — AI Calculator · Verified against: the compound price-index formula. Not financial advice.
The inflation equations
The factor (1 + rate/100)^years is the cumulative price multiple over the period. Multiply by it to find what a basket of goods will cost; divide by it to find what a fixed sum of cash will be worth in today's terms. Subtract one and convert to a percent for the total inflation experienced. Because the exponent is the number of years, the multiple grows geometrically — doubling the years far more than doubles the cumulative effect.
Worked example — 1,000 over a decade
Scenario: 1,000 today, 3% average annual inflation, 10 years.
After ten years at 3%, something priced 1,000 today will cost about 1,343.92 — a total inflation of 34.39%. The flip side is buying power: 1,000 left as cash will purchase only about 744.09 worth of today's goods, having lost roughly a quarter of its value. Stretch the horizon and the gap widens fast — at the same 3%, prices rise to 1,159.27 over 5 years and 1,806.11 over 20 years, while cash sinks to 862.61 and 553.68 respectively. That quiet erosion is why long-term money belongs in assets that out-earn inflation, not under the mattress.
Frequently Asked Questions
Future cost = amount × (1 + rate/100)^years. 1,000 at 3% for 10 yr = 1,343.92.
Reciprocals: prices rise ×1.344, cash value falls ×0.744 at 3% over 10 yr.
It compounds: 3% is ~16% over 5 yr, 34% over 10 yr, 81% over 20 yr.
Historical: the CPI. Forward: a central-bank target (~2%) or a 2–3% long-run average.
Real return = nominal − inflation. 2% interest at 3% inflation loses ~1%/yr of value.