Inflation has wide-reaching effects on the economy, influencing consumer spending, business investments, and employment rates, as well as government programs, tax policies, and interest rates. Understanding the concept of inflation is vital for everyone because it can diminish the value of your money over time.

Our inflation calculator is a tool to comprehend how the purchasing power of a specific dollar amount will evolve. In simple terms, as time progresses, the value of money tends to decrease.

Use Our Free Inflation Calculator For Accurate Financial Projections

Our Inflation Calculator relies on historical Consumer Price Index (CPI) data from the US It works by converting the purchasing power of the dollar across different years. Simply input an amount along with the initial and desired years for the adjusted inflation calculation.

Additionally, our calculator’s Forward Inflation (flat rate) and Backward Inflation (flat rate) features can be used to create theoretical scenarios and better prepayment for the future. These tools help determine inflation based on the amount, from the starting year to the ending year. Historically, inflation rates in the US and many developed countries tend to hover around 3%, providing a reliable baseline assumption.

Understanding Inflation

Inflation is when prices go up, essentially causing the value of money to decrease over time. You can measure how fast the value drops by looking at the average increase in prices for a bunch of chosen goods and services over a certain period.

The increase in prices, usually shown as a percentage, means that the same amount of money can buy less than it could before. Inflation is the opposite of deflation, where prices go down, and the purchasing power of money goes up.

What Is Deflation?

Deflation refers to a general decrease in prices for goods and services, often linked to a reduction in the supply of credit and money in the economy. When deflation occurs, the purchasing power of currency increases over time.

This decline in prices affects the nominal costs of labor, goods, capital, and services, causing them to fall, even though their relative prices may remain the same. Deflation has been a topic of concern among economists for many years. On the surface, deflation seems advantageous for consumers because it allows them to buy more goods and services with the same nominal income over time.

What Is Hyperinflation?

Hyperinflation is a common term used to depict the extreme, uncontrollable, and swift surge in general prices within an economy. While inflation gauges the speed of price increases for goods and services, hyperinflation involves inflation that skyrockets, typically surpassing over 50% per month.

Although hyperinflation is an uncommon occurrence in developed economies, it has been witnessed numerous times throughout history in countries like Germany, China, Hungary, Georgia, and Russia.

How Can You Calculate Inflation?

Calculating the inflation rate isn't as simple as just checking the price of one thing. It involves looking at a group of goods and services, often referred to as a "basket." In the US, we use the CPI to figure out inflation rates. The CPI considers a selection of goods and services that the government sees as a representative, tracking how their prices change each month and year.

To get the accurate results, use our calculator by following these steps:

  • Add the amount you want to calculate.
  • Add the starting year (Our calculator has data from 1914).
  • Add the ending year and that’s it; you have the option to calculate till the current year or the year forward (Calculate the estimation till 2073).

For instance, for any goods or services you purchased for $10 back in 2005, the same goods and services will cost you $14.94 in 2023. It doesn't mean your $10 as well magically turns into $14.94. It means that if you had stashed the $10 under your mattress for 18 years, it would only cover around two-thirds of the costs of the goods and services in 2023.

A Look Back At Inflation Rates

Looking back at historical inflation rates, while many countries dealt with inflation, and sometimes even hyperinflation, over the past 120 years, the US has mostly steered clear of those drastic increases. The average annual inflation in the US from 1913 to 2019 stood at 3.10%.

If you check out the historical inflation rates spanning from 1915 – 2019, you'll spot deflation during the Great Depression (1929 to 1939). There was also noticeable inflation during the '70s and early '80s.

In a broad statement, the government aims to manage inflation, typically keeping it around the 2% mark. This is done to ensure that inflation rates stay in a reasonable range. For context, the inflation rate from 2017 to 2018 was a modest 2.44%. However, it's worth noting that inflation spiked over 8.2% in September 2022 compared to the previous 12 months. In response, the Federal Reserve increased the short-term borrowing rate by 0.75% to curb inflation. This pushed the new target range to  3.75% –  4%, which is the highest since January 2008.

What Are The Causes Of Inflation?

Inflation has a significant impact on our daily lives, but what brings it about? Thеrе arе a couplе of factors at play:

Demand-Pull: This occurs when there’s a surge in demand for goods and services, but the supply doesn't keep up. In the short term, businesses struggle to ramp up production quickly, leading to higher prices.

Cost-Push: It's not always just increased demand; sometimes, rising production costs for businesses, known as cost-push inflation, play a role. For instance, if the prices of raw materials or labor go up, businesses might need to hike prices on the goods and services they offer. If this happens across enough businesses, it can result in an overall uptick in prices and high inflation rates.

Devaluation: Devaluation happens when a current loses value compared to other currencies, making imports pricier and potentially leading to inflation. For instance, if the US dollar loses value against the euro, it takes more dollars to buy the same amount of euros. This could prompt a business importing goods from Europe to raise prices to offset the increased cost.

Rising Wages: Opinions vary on how higher wages impact inflation. While increased wages may seem beneficial for workers, some economic experts argue that there could be consequences, especially concerning raising the minimum wage.

When workers earn more, they might have more money to spend on goods and services. This heightened demand could prompt businesses to increase prices to cover rising production and labor expenses. Contrary views exist. Some argue that past minimum wage hikes didn't necessarily align with inflation spikes. They propose that inflation rates might bе controlled because employers might hire fewer workers or increase productivity levels.

Frequently Asked Questions

Inflation has far-reaching effects on the economy, influencing consumer spending, business investments, employment rates, government programs, tax policies and interest rates.

The main causes of inflation can be categorized into three broad groups: demand-pull, cost-push, and inflation expectations.

During periods of inflation, prices rise, making it more expensive to incur debt. Consequently, companies often experience a decline in product sales, leading to a slowdown in the economy. This can result in reduced corporate profits, layoffs, and increased pressures on households, potentially culminating in a recession.

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