Saving & investing
Inflation and the Purchasing Power of Money
Distinguish nominal dollars from today's dollars and use CPI as context rather than a promise about future prices.
Nominal dollars and today's dollars answer different questions
A future dollar amount is nominal. Its purchasing power depends on how prices change. As a rough shortcut, the Rule of 72 says that prices would take about 24 years to double at 3% annual inflation. It is an approximation, not a forecast; exact compounding produces a slightly different result.
If you use a real return, inflation has already been removed from the return assumption. If you use a nominal return, either inflate the target or discount the ending balance, but do not apply both methods to the same comparison.
CPI is broad context, not your personal price index
The Bureau of Labor Statistics CPI calculator uses the CPI for All Urban Consumers, U.S. city average, all items and not seasonally adjusted. It measures a broad basket. Your spending may move differently because housing, health care, education and location have different weights.
Historical CPI can show what happened between two periods. It cannot promise a future inflation rate. For planning, compare more than one future assumption and update the model when the goal is long term.
Match the inflation assumption to the goal
A college, health care or housing goal may not track headline CPI closely. If you have a credible goal-specific estimate, keep it separate and label its source. Otherwise, use a broad assumption and show sensitivity rather than false precision.
Review fixed income sources too. An income stream without a cost-of-living adjustment loses purchasing power over time, while an indexed benefit may follow a formula that differs from your spending. For example, Social Security COLAs are based on CPI-W under current law, while the BLS calculator cited here uses CPI-U.
Bottom line
Use CPI to understand the past, then test more than one inflation rate when you plan future spending, income and goals.
Related calculators
Sources
- Bureau of Labor Statistics: CPI Inflation Calculator (opens in a new tab)
- Bureau of Labor Statistics: Consumer Price Index (opens in a new tab)
- Social Security Administration: Cost-of-Living Adjustment (opens in a new tab)
This guide is for general education, not personal investment, tax, legal or financial advice. Check current rules and talk with a qualified professional when the decision calls for it.