Saving & investing
Inflation: Definition, Formula and Example
Inflation is an increase in the general price level over a period, reducing how much a unit of money can buy.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Price inflation; Consumer price inflation.
How it works
A consumer price index tracks a specified basket and population, rather than every household’s exact costs. A falling inflation rate still means prices are rising if the rate remains positive; a falling price level is deflation. Forecast inflation and observed index changes are different inputs.
Inflation = ending price index / starting price index − 1; future equivalent cost = current cost × (1 + annual inflation)^years
Compare the same index and compatible periods. A constant annual rate is a projection, not a forecast of particular goods.
$1,000 of spending after two years at 3% inflation
Assume prices rise 3% in each of two years.
- Year 1 equivalent: $1,000 × 1.03 = $1,030.
- Year 2 equivalent: $1,030 × 1.03 = $1,060.90.
The same basket would cost $1,060.90; cumulative inflation is 6.09%.
A fixed basket and constant assumed rate; no claim about future CPI.
Try these example inputsA higher account balance may still buy less
Nominal growth can be smaller than inflation. Use the exact real-return relationship to compare purchasing power. Your rent, healthcare or education costs may also change differently from a broad index.
Explore with a calculator
- Inflation Calculator
Compare supported historical CPI periods or enter a hypothetical inflation rate.
- Real Return Calculator
Separate nominal growth from purchasing-power growth.
- College Cost Calculator
Project education costs using the cost-growth rate you enter.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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