Inflation is the rate at which prices rise over time, reducing what your money can buy. At 3% inflation, $100 today buys only $74 worth of goods in 10 years.
Source: Federal Reserve Economic Data (FRED). Values may be delayed.
At 3% annual inflation, $100,000 today will have the purchasing power of only $74,410 in 10 years and $55,370 in 20 years.
Inflation is why keeping money in cash loses purchasing power. Stocks have historically returned ~10% annually, beating 3% inflation by ~7% real return. Bonds return ~5%, barely beating inflation.
Your nominal return is what you see on paper. Your real return is what actually matters:
Real Return = (1 + Nominal Return) ÷ (1 + Inflation Rate) - 1
Example: 10% nominal return with 3% inflation = 6.8% real return
S&P 500 first half 2025: 7% nominal - 3.7% inflation = 3.3% real
| Asset | Impact | Typical Real Return |
|---|---|---|
| Cash | Loses purchasing power | ~0% or negative |
| Bonds | Fixed payments lose value | 1-2% |
| Stocks | Companies raise prices; resilient | 6-7% |
| Real Estate | Property values and rents rise | 3-5% |
| TIPS | Principal adjusts with CPI | ~0% (designed to match inflation) |
The Rule of 72 works both ways: At 3% inflation, the purchasing power of your money halves every 24 years. This is why long-term bonds are risky — their fixed payments buy less and less over time.
Stocks are the best inflation hedge long-term: During rising inflation, S&P 500 returns average ~5.3% vs ~10.4% otherwise. Lower, but still positive. Bonds average only ~2% real during high inflation.
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Try Inflation Calculator →What causes inflation?
Inflation is caused by demand-pull factors (too much money chasing too few goods), cost-push factors (rising input costs like wages and raw materials), and monetary expansion (central banks increasing money supply). The COVID-19 pandemic caused all three simultaneously in 2021-2023.
What is the Fed's target inflation rate?
The Federal Reserve targets 2% annual inflation as measured by PCE (Personal Consumption Expenditures). This level is considered enough to encourage spending and investment without eroding purchasing power too quickly. Core PCE is preferred over CPI because it excludes volatile food and energy prices.
How does inflation affect my savings?
At 3% inflation, $100,000 in a savings account earning 0.5% interest loses about $2,500 in real purchasing power every year. Over 20 years, that $100,000 effectively becomes worth only $55,370 in today's dollars. This is why keeping large cash balances long-term is costly.
What's the difference between CPI and PCE?
CPI measures a fixed basket of goods for urban consumers. PCE covers a broader range of spending and accounts for substitution (consumers switching to cheaper alternatives). The Fed prefers PCE because it better reflects real-world behavior. CPI typically runs about 0.3-0.5% higher than PCE.