Last updated: March 2025
Quick Answer
At 3% annual inflation, $100 today will only buy $74 worth of goods in 10 years. To maintain purchasing power, your investments must earn at least the inflation rate.
Key Takeaways
- ✓ Inflation erodes purchasing power — the same dollar buys less over time
- ✓ At 3% annual inflation, prices double roughly every 24 years
- ✓ Rule of 72: divide 72 by the inflation rate to estimate doubling time
- ✓ Investment returns must exceed inflation to generate real gains
What Is Inflation?
Inflation is the rate at which prices rise, causing purchasing power to fall. At 3% inflation, $100 today buys only $97 worth of goods next year. Over decades, the effect is dramatic — $100 in 1990 equals roughly $240 in 2024.
How This Calculator Works
Future Value = Present Value × (1 + Inflation Rate)^Years
Purchasing Power = Present Value ÷ (1 + Inflation Rate)^Years
The Rule of 72
Divide 72 by the inflation rate to estimate years for prices to double. At 3%: ~24 years. At 6%: ~12 years.
Impact on Business
- Pricing — Without inflation-matching price increases, real margins shrink yearly
- Savings — Cash earning 1% while inflation is 3% loses 2% real value. Use our Compound Interest Calculator to model real returns.
- Salaries — Employees without inflation raises effectively get pay cuts
- Contracts — Multi-year contracts without inflation adjustments erode profitability
Frequently Asked Questions
What is inflation?
Inflation is the rate at which the general price level of goods and services rises, eroding the purchasing power of money. If inflation is 3% per year, something that costs $100 today will cost $103 next year.
What is a typical inflation rate?
In the US, the Federal Reserve targets 2% annual inflation. Historical averages range from 2-3% per year over the long term, though rates can spike significantly during certain periods.