Understanding Inflation and CPI
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. The Consumer Price Index (CPI) is the most widely used measure of inflation. It tracks changes in the price of a basket of consumer goods and services over time.
How is Inflation Calculated?
To determine how much a specific amount of money from the past is worth today, we use CPI values from the start year and end year. The formula used is:
Adjusted Amount = (Start Amount / CPI of Start Year) × CPI of End Year
This calculator relies on historical CPI data. For currencies outside of USD and GBP, we utilize US inflation trends as a global proxy to estimate purchasing power changes.
Why Calculate Inflation?
- Investment Planning: Understanding the "real" return on an investment after subtracting inflation.
- Salary Negotiations: Determining if a salary offer keeps pace with the cost of living.
- Retirement Planning: Estimating how much money you will need in the future to maintain your current lifestyle.