Inflation Calculator

An inflation calculator is a budgeting and financial planning tool that estimates how much the costs of goods or services will increase over time because of inflation. It is universally useful because it helps people understand how much their expenses may grow over time. By knowing this crucial bit of information, you can plan your savings and investments smartly.

The goal is to ensure that your money grows faster than inflation does. This way, your savings always exceed your expenses. An inflation calculator helps you compute the future cost of today’s goods and services, so you can adjust your savings accordingly.

To use the inflation adjustment calculator, you need to enter the following basic details:

• The Current Cost:

This is the current amount that you spend on a particular product or service.

• The Rate of Inflation:

  This is the expected rate of inflation per annum. You can compute it using the inflation rate formula or use expert insights as benchmarks.

• The Period:

This is the period over which you wish to compute the effects of inflation.

Inflation affects your savings because, over time, it reduces the purchasing power of the money saved up. When inflation increases, the prices of goods and services rise. This means that the money you save will buy less in the future than it does today.

Let us discuss an example to understand this better. Say you have Rs. 1,000 today. This means you can purchase 10 chocolate bars, each of which costs Rs. 100. However, say the annual rate of inflation is 10%. This means each chocolate bar will cost Rs. 110 next year. With the same Rs. 1,000, you can only buy 9 chocolate bars.

Inflation also has the effect of reducing the rate at which your savings grow. For instance, if inflation is pegged at 5% and your savings earn interest at 3%, you effectively lose 2%. Even if your savings grow faster than inflation, say at 6%, the growth is reduced by the rising prices of goods and services.

To find the inflation, you need to know the inflation rate. You can find this using the inflation rate formula. Then, once you know the rate of inflation, you can apply it to the expense concerned and measure how much it will increase (or inflate) over a given period. The Consumer Price Index (CPI) is crucial for finding inflation figures.

To find the CPI, you can use this formula:

CPI = (Cost of Fixed Basket of Goods and Services in the Current Year ÷ Cost of Fixed Basket of Goods and Services in the Base Year) x 100

You can then use the CPI in the inflation formula to proceed with your calculations.

Formula for Inflation

The inflation rate formula is quite simple. It involves using the Consumer Price Index. Check out the formula below:

Inflation = [((CPI_x+1 – CPI_x) ÷ CPI_x)] x 100

Here, CPIx is the initial CPI or the index of the previous year. CPIx+1 is the consumer price index of the next (or the current) year. The inflation calculator uses this formula to find the inflation rate and the future value of a current expense.

Benefits of Inflation Calculator

An inflation calculator can be useful in many ways. Check out the top reasons to use an inflation adjustment calculator as a part of your budgeting routine.

• Better Financial Planning

  With an inflation calculator, you can easily project future costs. This helps you create a more accurate budget and improves your long-term financial planning. When you understand how inflation could impact your expenses over time, you can make smarter decisions about savings, big purchases and investments.

• Protection of Purchasing Power

  By using an inflation calculator, you can also find out how much your money will be worth in the future. This knowledge can be useful if you want to adjust your investment strategies and savings goals to ensure that your wealth maintains its real value over time. Ultimately, this helps you retain your purchasing power.

• Improved Investment Planning

  The primary goal of all investments is to help you achieve your financial goals and lead a comfortable life. For this reason, it is crucial to factor in inflation. With an inflation calculator, you can assess the real returns on your investments by accounting for the effects of rising prices and declining purchasing power.

• Free and Easy to Use

  Above all, an inflation adjustment calculator is free to use and easy for beginners too. All you need to do is submit some basic details like the current cost, inflation rate and time. The calculator then uses the inflation formula to find how much the current cost will grow over time.