Frequently asked questions
What inflation rate should I use for planning?
For most developed economies, 2–3% is a reasonable long-term average. For education or healthcare costs, 5–6% is more realistic. Use your country's recent average as a starting point and round up slightly for conservative planning.
Does this account for compounding?
Yes. Inflation compounds annually — each year's increase is applied on top of the previous year's price level, so the effect accelerates over time. The formula is amount × (1 + rate)^years.
Why does purchasing power fall so much over long periods?
Compounding works against you. At 3% inflation, prices double roughly every 24 years. Over 30 years your money retains only about 41% of its original buying power if left uninvested.
How do I protect my savings from inflation?
Invest in assets that historically outpace inflation — equities, real estate, inflation-linked bonds (TIPS/I-bonds), or diversified funds. Cash and low-yield savings accounts typically lose purchasing power after inflation.
Is the real return on my investments just return minus inflation?
Approximately. The precise real return is (1 + nominal) / (1 + inflation) − 1. For small rates the subtraction is close enough, but over long periods the exact formula matters.