Understanding Inflation and Its Impact on Your Money
Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power of currency is falling. Our Inflation Calculator helps you understand this concept by showing how the value of money changes over time. You can use it to see what a certain amount of money in the past would be worth today, or what today's money might be worth in the future.
How the Inflation Calculator Works
The calculator uses the Consumer Price Index (CPI) to adjust the value of money over time. The CPI measures the average change in prices paid by urban consumers for a basket of consumer goods and services.
The Inflation Formula
The formula to adjust for inflation is straightforward:
Final Amount = Initial Amount × (Final Year CPI / Initial Year CPI)- Initial Amount is the amount of money you want to convert.
- Initial Year CPI is the Consumer Price Index for the starting year.
- Final Year CPI is the Consumer Price Index for the ending year.
Our calculator uses historical CPI data for past calculations and an estimated future inflation rate for projections.
Practical Example: The Price of a Car
Let's say a new car cost $5,000 in 1975. What would that be equivalent to in 2023?
We need the CPI values for both years (these are approximate for illustration):
- Initial Amount: $5,000
- CPI for 1975: 53.8
- CPI for 2023: 304.7
Now, we apply the formula:Final Amount = $5,000 × (304.7 / 53.8) ≈ $28,318
This means that a car that cost $5,000 in 1975 would have the same purchasing power as approximately $28,318 in 2023 due to inflation.