Inflation

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Inflation has varied considerably over the past 100 years, from the double-digit inflation of the early 1980s to the deflation in the wake of the financial crisis. With this calculator that uses historical inflation data from the U.S. Department of Labor, you can see just how much the purchasing power of your money has declined over the years.

What is inflation?

When it comes to money, inflation refers to an increase in prices over time, which subsequently leads to a decline in the purchasing power of money. As a simplified example, if a DVD cost $10 last year and prices inflated by 5% this year, you can expect that DVD to now cost $10.50. You'll need 5% more money to buy it. In other words, if you had kept $10 in cash, it is now worth less -- it used to be enough to buy that DVD, but it isn't now.

Inflation depends on a bunch of economic factors, and there are several ways to calculate it. The most commonly used way to measure inflation in the United States is the Department of Labor's Consumer Price Index (CPI), which uses a representative basket of goods and services used to determine trends in prices over time.

As a general rule, when the economy is healthy, a moderate (low single-digit) inflation rate is to be expected. Sometimes, inflation can be a little misleading if the price of a certain item either skyrockets or collapses. For example, when gasoline prices dropped by more than 50% about a year-and-a-half ago, it made the inflation rate look lower than it otherwise would have.

Historical inflation calculator

Over the past 100 years, the inflation rate in the U.S. has averaged 3.22% per year, but this amount has varied widely. At one extreme, the inflation rate has been as high as 18% in 1910, and reached double digits again eight times since then. On the other hand, we actually experienced negative inflation rates -- known as deflation -- a few times, particularly in the wake of the great depression and financial crisis.

Here's a calculator that used the Department of Labor's CPI data to show just how much the purchasing power of money has eroded over certain periods of time.

 

* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

As an example, let's say that you put $1,000 in an envelope under your mattress 30 years ago. According to the calculator, you would need $2,203 today in order to have the same ability to pay for goods and services. In other words, your $1,000 would have lost nearly 55% of its purchasing power by keeping it in cash for the past three decades.

One major takeaway from this data

The main thing you should notice here is that cash actually loses value over the long run. This is why investing is so important. Stocks, bonds, and even real estate have historically produced gains that are significantly above the inflation rate. Savings accounts, not so much -- especially in the current environment of near-zero interest rates.

So, if you have a bunch of cash sitting around in a savings account, or worse yet, under your mattress, you should seriously consider putting that money to work. You don't need to be a stock market expert either -- a few basic index funds can do the job just fine. Whatever you do, don't let your money lose its value over the years. By not investing, you're literally asking to lose your money's purchasing power.

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