Inflation: How It Erodes Your Money Over Time
Inflation is the rate at which the general price level of goods and services rises over time, reducing the purchasing power of money. A 3% annual inflation rate means that something costing £100 today will cost £103 next year — and £134 in 10 years.
Purchasing Power Formula
Future price = Present price × (1 + inflation rate)ⁿ
Present value = Future amount ÷ (1 + inflation rate)ⁿExamples
- £100 today at 3% inflation → £134 in 10 years (you need 34% more to buy the same thing)
- £50,000 in savings: at 3% inflation, real value in 10 years ≈ £37,200
- Salary £40,000 with 2% annual rises and 4% inflation: real wages fall ~2% per year
Inflation Measures
- CPI (Consumer Price Index): Tracks a basket of consumer goods. Most common measure.
- RPI (Retail Price Index, UK): Older measure, includes housing costs. Usually higher than CPI.
- Core inflation: Excludes food and energy (more volatile), shows underlying trend.
- PCE (USA): The Federal Reserve's preferred inflation measure.
Protecting Against Inflation
- Cash in low-interest accounts loses real value every year
- Index-linked bonds (gilts/TIPS) adjust returns with inflation
- Equities have historically outperformed inflation over 10+ year periods
- Property can hedge inflation but with liquidity risk
Calculate inflation-adjusted values: Free Inflation Calculator