How to Calculate Inflation & Future Value of Money
Inflation erodes the purchasing power of money over time. Understanding how to calculate inflation impact helps in financial planning and investment decisions.
Inflation Impact Formula
Future Price = Current Price × (1 + inflation rate)^years
Where:
- Future Price = Price of goods/services in the future
- Current Price = Today's price
- inflation rate = Average annual inflation rate (decimal)
- years = Number of years into the future
Step-by-Step:
- 1
Identify current cost
Note the current price of the item or expense.
- 2
Estimate inflation rate
Use historical average (6-7% for India, 2-3% for US).
- 3
Set time horizon
How many years into the future.
- 4
Apply the formula
Calculate the future price.
Worked Examples:
Cost of ₹50,000/month expenses in 20 years
Current Expense: ₹50,000/monthInflation: 6%Years: 20
Result: ₹1,60,357/month
50000 × (1.06)^20 = ₹1,60,357. You'll need 3x more to maintain the same lifestyle.