What's a "safe" amount of inflation?
As an investor or wage earner, do you believe that 2% won't hurt you? After all, that's been the Fed's target for some years now.
If that's what you think, then you might be surprised to learn that if inflation had averaged just 2% for 20 years (basically 1/2 a working lifetime), a wage earner would have to be earning over 40% more today than they had been making in 1996 just to stay even. (Actually, the number is very close to 50%.)
Ok, you say, but when compared with the 1970s and early 1980s, the 1990s and 2000s have been a period of relatively low inflation. This is particularly true for the past eight or so years. It's not possible that inflation had averaged even close to 2%.
In fact, between 1996 and 2016 inflation, as measured by the US Consumer Price Index, has averaged slightly more than 2%! More below
Why Use an Inflation Calculator?
As we see above, inflation can have quite an impact on your earnings and investments. An inflation calculator lets you personalize the results.
For example, two popular uses for this calculator come immediately to mind.
A sizeable chunk of workers has not had a raise for two, three, or even more years. Now that the US economy has improved, and unemployment is below 5%, companies are starting to compete to retain their best workers. They are offering raises!
If you are lucky enough to be in this situation, use this calculator to make sure you get an increase in real terms - an increase that is more than the rate of inflation.
The US Census Bureau reports that as of 2014 the median income for all households was $53,657. Use the historical inflation calculator to see what the family income has to be in 2017 to keep even with inflation.
Historical inflation calculations are also useful for retirement planning and investing.
Knowing historical inflation makes it possible to let the past guide your future estimates.
Enter any date range you want to get the average rate of inflation; then you can plug that number into my Retirement Calculator to optionally adjust either pre-retirement or post-retirement income or both. (The geek in me finds it interesting how there have been periods of very low inflation and even deflation and periods of high inflation, but over the course of nearly any 20 year period, the average is frequently between 2 and 3 percent - but not always of course.)
You can also use the future inflation calculator and the average rate of inflation to calculate what you want your income to be during the first year of retirement.
Here's a quick example of what I mean.
If you earn $100,000 a year now and you want to have income when you retire that is equal to 70% of your working income, then you want to have $70,000 annual income. But that number is before inflation!
Suppose you have 25 more years to work? What should your income be when you retire to equal the $70,000?
That's what this calculator will tell you. At 2.5% inflation, about $129,000. Yikes!!
You know what else this calculator teaches you?
It tells you that if you don't plan for an inflation adjusted retirement income and you only aim for the $70,000 number, that it will be like living on $38,000 today (ending value). Maybe that's not a bad amount, but if you want a lifestyle that is equal to what a $70,000 income buys, then ending up at $38,000 is going to much different retirement than what you had hoped for.
I think the ending value is important. Frequently it is easier to imagine what it would be like doing something when an amount is adjusted for inflation and expressed in today's terms rather than have the amount calculated to equal what you'll need in the future. The future is largely an unknown. But if you were to ask yourself how would you like to live on about half of what you expected - well, that's much easier to imagine.
What's Makes This Calculator Better Than Others?
As I've done for all calculators on this site, when designing this calculator, I researched what my competition was providing and asked myself, "how can I make a better calculator?"
- Inflation calculators seem to either base their calculation on historical data or they allow the user to enter an assumed inflation rate. This calculator gives the user both options.
- This calculator shows the historical inflation rate data.
- Not only is the equivalent future amount calculated, but the calculator calculates today's value. This is the number that will give you the best gauge or what it would be like to live on an amount IF the amount does not keep up with inflation.
By the way, the United States historical data comes from the Bureau of Labor Statistics, the keepers of the Consumer Price Index (CPI). Also, it is worth noting that they have recently (?) changed their inflation calculator so as not to use annual averages. Rather, they use monthly data to calculate inflation's impact.
For use on this site, such as retirement planning, I think using inflation rates calculated using annual average CPI data is more useful. Monthly data is unnecessarily volatile. But if you want to calculate inflation's impact using monthly data, or if you just want to compare, please use the BLS Inflation calculator (Page will open in a new tab). But don't forget to come back!
And while we are at it...
What is Inflation
Inflation is a change in prices as represented by a price index over a defined period. The change is converted to a percentage to make comparisons with other periods meaningful. The percentage is the inflation rate reported by the press.
If the rate is negative, then we call it deflation. Prices are falling.
Over time, if the change in the inflation rate is falling, we have disinflation. For example, in 2000 the US annual inflation rate was 3.3%. In 2001 it was 2.8%, and in 2002 it was 1.5%. Between 2000 and 2002 is a period of disinflation because the rate of increase was falling but prices were still going up.
What causes it? Bet you only know half the story.
In the last century, there have been several periods of extreme inflation around the world. Business Insider has a good write-up with historical examples of hyperinflation, for those interested.
One of the most famous periods of inflation was in Weimar Germany, and it lasted from August 1922 - December 1923. Business Insider reports that the daily inflation rate was 21%!
And closer to home, CNBC reports that Venezuela's inflation hit 800% in 2016.
These extreme cases and even cases of moderate inflation happen when governments print money to pay their bills. Printing money is most likely the reason you've heard about, and it is the classic explanation for the cause of inflation.
But inflation is also caused by the expansion of credit.
The expansion of what?
Good question. It took me a little while to grasp this concept too. Let me explain...
When interest rates are low or falling, and lenders want to lend, credit, is said to be easy. The most recent example of such a time in the US and elsewhere is during the period leading up the housing crises. Interest rates were low, and even people with questionable credit were getting mortgages.
So what happen?
Inflation! Housing prices went up.
Think about it for a minute. If you are in the market for a house, and interest rates are falling or are low, and you want a particular home that someone else also wants, you might tend to offer the seller a higher price than if interest rates were high.
After all, it only costs a little bit more each month to finance $10,000 over 30 years. When credit is cheap and available, you can spend more than when credit is tight.
When buyers have the ability to pay just a little bit more, lo and behold, what do they do? They bid up the prices of homes.
You know where else we see the impact of credit expansion on prices? Care to guess?
College educations! Make credit available, the seller of the service has less incentive to keep prices down and the buyers of a service will pay the price.
Intentions are good, but now we have unaffordable college educations and a millennial generation saddled with a debt burden.
And an economy that is sluggish because those saddled with the debt are unable to afford an apartment and set up a household. They are living in their parent's basement.
And there you have it. The causes as well as the impact of inflation.
What country do you live in?
You'll notice the country select box in the calculator. If you can provide links to a country's inflation rates from official data sources, I'll be happy to add those rates to this calculator.
You can leave the link in the comment below.