What today's money will buy later
This is the mirror of an inflation calculation. Instead of asking what something will cost, it asks what a fixed sum will still buy — the question that matters for anyone holding cash or receiving a payment that does not rise.
The formula
Worked example: $1,000 at 3% for 10 years
- Buys what $744.09 buys today
- Purchasing power lost: $255.91, or 25.6%
The note in your hand is still $1,000. A quarter of what it could do has gone, and nothing visible happened to it.
The erosion over a working life
| Years | At 2% | At 3% | At 5% |
|---|---|---|---|
| 10 | $820 | $744 | $614 |
| 20 | $673 | $554 | $377 |
| 30 | $552 | $412 | $231 |
| 40 | $453 | $307 | $142 |
At 3%, money halves in purchasing power roughly every 24 years. Someone retiring at 65 and living to 90 will see the value of a fixed income fall by more than half during retirement.
Where this bites hardest
Anything that pays a fixed nominal amount for a long time: a level annuity, a long bond, a pension without indexation, a fixed-price contract.
A level annuity paying $40,000 a year is paying $29,700 in today's money by year ten and $22,100 by year twenty. The cheque is identical every year, which is exactly what makes the loss invisible.
The other side: fixed debt
Inflation destroys the value of money owed as well as money held. A $360,000 mortgage repaid over thirty years is repaid in progressively cheaper dollars, and the final payment costs roughly 41% of what the first one did in real terms.
Borrowers with fixed-rate debt are among the few beneficiaries of unexpected inflation, which is worth knowing when deciding whether to prepay.
What this calculator leaves out
Any return on the money. Cash at 4% while inflation runs at 3% loses only 1% a year, not 3%. Use a real return calculator if the sum is invested rather than held.
Protecting against it
Three assets have historically kept pace: equities, property, and index-linked bonds whose principal rises with the published rate. Cash and conventional bonds have not.
The practical rule that follows is about time horizon rather than risk tolerance. Money needed within two or three years belongs in cash despite the erosion, because the alternative can fall 30% in the window you need it. Money not needed for a decade loses more in cash than it risks in the market.
Salary is a fixed payment too
A salary that does not rise is a shrinking salary. At 3% inflation, staying on the same figure for five years is a 13.7% pay cut in purchasing power, and for ten years a 25.6% one.
A 2% annual raise during 3% inflation is still a cut, just a slower one. The figure to negotiate against is the inflation rate rather than last year's salary, and framing it that way changes the conversation from what you want to what has already happened.
Related calculators
- Inflation calculator — what a cost becomes rather than what money buys
- Real interest rate calculator — the return after inflation
- Retirement withdrawal calculator — where fixed income meets this problem