Inflation and purchasing power calculator
Money sitting still loses value quietly. This shows what a sum will actually buy in future, how much you would need just to stand still, and whether the interest you are earning is genuinely beating inflation or only appearing to.
Your money
Your result
Worth in today's money
£0
On paper against in reality
The gap between the two lines is purchasing power quietly disappearing.
How this is worked out
Inflation compounds in the same way interest does, just in the wrong direction. To find what a future sum is really worth, you divide by the compounded inflation rate rather than multiplying.
worth in today's money = amount ÷ (1 + inflation)^years
amount needed later = amount × (1 + inflation)^years
real return = ((1 + interest) ÷ (1 + inflation)) − 1
That last line matters more than it looks. People usually subtract inflation from their interest rate, so 4% interest with 3% inflation feels like 1% of real growth. The correct figure is slightly lower, about 0.97%, because the inflation applies to the interest too. Over a few years the difference is small, and over decades it is not.
A worked example
£20,000 earning 4% with inflation at 3% grows to roughly £36,000 after fifteen years. That looks like an excellent result until you adjust it: in today's money it is worth about £23,100. You are genuinely better off, but by around £3,100 rather than £16,000.
Why cash in a current account is a slow loss
Money earning nothing while inflation runs at 3% loses roughly a fifth of its purchasing power over seven years, and half of it over about twenty-three. Nothing appears to happen, because the number on the statement never changes. That is precisely what makes it easy to ignore.
What to take from this
- An emergency fund still belongs in cash, even at a negative real return. Being able to reach it immediately is the point of it, and that is worth paying for.
- Beyond that, the real rate is the number that matters. A headline savings rate means nothing without knowing what inflation is doing alongside it.
- Long-term goals need a real return. Money set aside for something twenty years away will be badly eroded if it sits somewhere earning less than inflation.
- Tax makes it worse. Interest may be taxable depending on the account and your personal savings allowance, and tax comes off the nominal return, not the real one.
What this assumes
A single steady inflation rate throughout, which never happens in practice. Inflation arrives in bursts, and the rate that matters to you personally depends on what you actually buy, since energy, food and rent rarely move in step with the headline figure. Treat this as an illustration of the mechanism rather than a forecast, and try a few different rates to see how sensitive the answer is.