Consumer Price Inflation Calculator

A dollar doesn’t seem to buy what it used to. Does it? In fact, this calculator can show you just how much inflation has affected the buying power of a specific amount of money. This calculator shows how inflation has affected consumer buying power over time. Results are based on the annual average CPI (Consumer Price Index), as reported by the Bureau of Labor Statistics, for the years 1913 to 2020. Data is estimated for 2021 through 2026.

First enter a dollar amount. How about $5? Then pick a base year and a result year from the corresponding pull-down menus. Let’s look at the year 1999 all the way to 2020. Press CALCULATE, and you’ll discover that $5 had the same buying power in 1999 that $7.77 has now. If you’d like, you can consider longer or shorter periods of time. No matter what you do, though, you’ll see that the value of a dollar typically declines over time, increasing the cost of living. Data used in the calculator comes from the BLS January date for the corresponding year & is shown under the "Data" tab.

5 Ways Inflation Impacts Investments

Inflation has an indirect, but important impact on your investments. These five ways inflation impacts investment returns gives you the why and the how. Take this information with you when talking with a financial advisor about your retirement account, especially if you're living on a fixed income.

Increase in the Cost of Goods and Services

Why It's a Problem: Inflation causes the prevailing price for most goods and services to rise. As a result, you need more money to buy affected items now than you did in the past. In short, the $100 you investment today in your retirement, might only buy $50 worth of goods in the future because of inflation. Your investments suffer because money is worth less and you need more of it just to keep up with increasing prices.

How to Fight Back: Offsetting rising future costs due to inflation depends on your ability to plan and budget. Inflation rates vary from month to month depending on the country's economic circumstances. If you plan to live on a fixed income in your retirement, budget for your necessities, leaving financial wiggle room for increases in their cost. For detailed information, pay attention to the Consumer Price Index, which can help you anticipate your cost-of-living expenses.

Diminished Long-Term Purchasing Power

 

Why it Hurts Investments: The true impact of inflation on the value of money from your perspective as a consumer is your reduced purchasing power. You have less ability to buy goods and services. Investments suffer too because inflation reduces rate at which they grow. If your portfolio doesn't earn enough interest to keep up with the rate of inflation, the purchasing power of your investments diminishes instead of grows.

Basically, you receive a negative return for the money you put in and not a positive one. Fixed-income investments are particularly vulnerable to this phenomenon because the interest rates associated with them don't usually fluctuate over their life. They're stuck at a predetermined growth percentage until maturity, meaning the inflation rate could potentially eclipse that figure producing a negative return.

How to Anticipate Losses: Calculate the real interest rate on your investments instead of only paying attention to its nominal or stated interest rate. To get the real interest rate, subtract the prevailing rate of inflation from the nominal rate. For example, let's assume the nominal rate on an investment is 3 percent, and the inflation rate is 2 percent. The real interest rate on that investment is 1 percent. This figure means the investment has a positive growth rate.

Prior to World War 2 the purchasing power of the Dollar went both ways. As the economy boomed and credit flowed easily the value of the currency fell, then when recessions hit the value of the currency rose sharply.

On August 15, 1971 President Nixon closed the gold window, which decoupled the U.S. Dollar from the value of gold.

Since then, rising prices & year over year positive rates of inflation have been a persistant aspect of monetary policy.

Bond Value Falls as Inflation Rises

Why Value Matters: The value of the principal of fixed-income investments and securities like bonds drops in periods of high inflation. The money you spend to buy a savings bond today could be worth significantly less in the future. For example, if you buy a 10-year U.S. Treasury bond for $100, and the annual rate of inflation is 4 percent, the value of your principal investment ($100) reduces by $40 to $60 over the bond's 10-year term. Because the value of your initial investment diminishes, the total value of your return on that investment also falls.

Look Into Protected Securities: Inflation is a fact of life for every economy. While you can't stop inflation from occurring, you can protect your fixed-income investments from damage. Buying floating-rate notes or inflation-linked bonds can help insulate your retirement fund from inflation's negative effects.

Floating-rate notes give coupons that increase or decrease in value under certain inflation rates. These notes also reset their interest rates at key points to account for economic changes. Inflation-linked bonds issued by the federal government, called Treasury Inflation-Protected Securities in the United States, tie directly to changes in inflation. The principal and interest on these securities adjust to accommodate variances in inflation in line with the Consumer Price Index.

Prices Drop for Fixed Income Securities

Why Interest Increases with Inflation: As inflation increases, interest rates also rise because of actions taken by the Federal Reserve to curb rising inflation or due to market expectations that conditions could get worse. With rising interest rates, you'll also see a decrease in the price of fixed-income investments, including bonds. Falling prices for these securities can lead to smaller total returns on investment for them.

How to Diversify Your Portfolio: A retirement portfolio that has only fixed-income investments is at the mercy of annual inflation rates. You don't want to have a down economy eating away at your retirement savings just when you're about to stop working. Contact a financial advisor to discuss strategies to diversify your portfolio to include a variety of investment vehicles that can help your nest egg whether tough economic times.

Stock Values Can Fluctuate with Inflation

Why Corporations are People: Part of your diversified investment portfolio will likely include common stocks from publicly traded corporations. These larger companies can control their prices during inflation to combat its negative impact on their revenue, though they're not completely immune. Corporations, like people, usually have cash on-hand to make immediate purchases. The more cash corporations have, the greater impact they feel from inflation because of its penchant for diminishing the value of money.

How to Watch Stock Value: Over the long-term, stocks are a solid option to grow your retirement fund and help insulate it from inflation. In the short-term, however, stock values can experience significant volatility during periods of suddenly high or low inflation. This shakeup in the market leads to investor uncertainty about business revenue forecasts, which causes corresponding short-term stock values to sag. In contrast, the value of commodity investments -- precious metals, food, energy, etc. -- tend to increase during higher inflation conditions.

Losses occur in investment even in the safest circumstances. While you can never predict the future with absolute certainty, you can take the necessary steps now to shield as much of your investment money as possible from inflation's negative effects. Taking proactive steps now might just be the difference between an adequate retirement fund and a threadbare portfolio.

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