Inflation Calculator

Inflation is the reason a salary that has not changed in five years is a pay cut.

Last reviewed: September 22, 2026Written and checked by the Life Calculator editorial team

How it is calculated

Inflation compounds exactly like interest, but in the opposite direction:

Future cost of today's goods = amount × (1 + rate)^years Purchasing power of a fixed sum = amount ÷ (1 + rate)^years

At 2.5 % — the target of most central banks — £10,000 kept under a mattress for 20 years still says £10,000, but buys what £6,103 buys today. Nothing was stolen and no transaction occurred; the money simply bought less each year.

Nominal and real returns

This is the distinction that matters most for savers:

Real return ≈ nominal return − inflation Exactly: (1 + nominal) ÷ (1 + inflation) − 1

A savings account paying 3 % when inflation is 4 % gives a real return of about −1 %. The balance grows and the purchasing power shrinks. Headline rates are always nominal, which is why comparing them to inflation is not optional.

The corollary applies to debt. Fixed-rate debt is eroded by inflation: a £200,000 mortgage fixed for 25 years is repaid in money worth progressively less, which is why unexpected inflation transfers wealth from lenders to borrowers.

Choosing a rate

The default of 2.5 % reflects the long-run target of the Bank of England, the ECB and the US Federal Reserve. For historical context, UK inflation averaged roughly 3 % over the last forty years, with a peak above 11 % in 2022 and periods near zero in the 2010s.

Two caveats worth knowing. First, headline figures measure a basket of average consumption; your personal inflation rate can differ substantially depending on whether your spending is weighted towards rent, energy, childcare or electronics — the last of which routinely falls in price. Second, long projections are highly sensitive to the assumed rate: over 30 years, the difference between 2 % and 4 % is the difference between losing 45 % and losing 69 % of purchasing power.

Frequently asked questions

Does inflation mean I should not hold cash?

It means cash is a poor long-term store of value, not that you should hold none. Cash you need within a few years — an emergency fund, a house deposit — belongs in cash regardless, because capital security matters more than return over short horizons. It is long-term savings that inflation erodes seriously.

What is the rule of 70?

Divide 70 by the inflation rate to get the years for prices to double. At 3 %, about 23 years. It is the same mathematics as the rule of 72, applied to prices rather than investments.

Why does official inflation feel lower than my experience?

Because the official basket is an average across the whole economy, and your spending is not average. Rent, energy and food have risen faster than the headline rate in recent years, and these dominate lower-income budgets. Someone who spends most of their money on those categories genuinely experiences higher inflation than the published figure.