What is Inflation?
Inflation is the rate at which the prices of goods and services rise over time. As prices rise, the same amount of money buys less than it did before, so the value of your money falls.
For example, if inflation is 6% a year, something that costs ₹1,000 today will cost ₹1,060 next year. Over many years, these increases add up, because each year’s rise is on top of the last.
In India, inflation is usually measured by the Consumer Price Index (CPI), and the Reserve Bank of India aims to keep it around 4%.
Fun fact
At 6% inflation, prices roughly double every 12 years. You can estimate this with the Rule of 72: divide 72 by the inflation rate.
What is an Inflation Calculator?
An inflation calculator shows how much something that costs a certain amount today will cost in the future, based on the rate of inflation and the number of years.
Why you should use an Inflation Calculator?
- Set realistic goals: Plan for the future cost of goals like your child’s education or your retirement, not today’s cost.
- Check your returns: If your savings grow slower than inflation, you are losing money in real terms.
- Plan big purchases: See how much a house, car or wedding will cost by the time you buy it.
How Does an Inflation Calculator Work?
The inflation calculator works on the following inputs:
- Current Cost: What the item or goal costs today.
- Rate of Inflation: The yearly rate at which you expect prices to rise.
- Time Period: The number of years from now.
The calculator relies on the following formula:
Future Cost = Current Cost × (1 + r)^n
- r
- Yearly rate of inflation (rate ÷ 100)
- n
- Number of years
Formula to Calculate Inflation with an Example
Consider an example for a better understanding.
- Current Cost: ₹50,000
- Rate of Inflation: 6% per annum
- Time Period: 10 years
Using the formula:
Future Cost = 50,000 × (1 + 0.06)^10
After calculation, the future cost is ₹89,542. The same item will cost ₹39,542 more in 10 years.
Things to keep in mind
- Rates vary: Some costs, like education and healthcare, often rise faster than overall inflation. Use a higher rate for them.
- Beat inflation: To grow your wealth, your investments need to earn more than inflation after tax.
- It’s an estimate: Inflation changes from year to year, so treat the result as a guide, not an exact figure.