The Silent Tax on Your Wealth
Inflation is often called the "silent tax." It is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
If the inflation rate is 3%, a loaf of bread that costs $1.00 this year will cost $1.03 next year. While that sounds small, compounded over 10 or 20 years, it can devastatingly reduce the value of cash savings that aren't invested.
The Inflation Formula
Calculating future inflation uses the same logic as compound interest, but working against you:
Future Cost = Present Cost × (1 + Rate)Years
To calculate Purchasing Power (how much your cash
is actually worth in future terms), we divide instead of multiply:
Value = Amount / (1 + Rate)Years
The Rule of 72 (Inflation Edition)
The Rule of 72 works for inflation too. It tells you how long it takes for prices to double (or your money to lose half its value). Simply divide 72 by the inflation rate.
- 3% Inflation: Prices double in 24 years.
- 6% Inflation: Prices double in 12 years.
- 9% Inflation: Prices double in just 8 years.
Frequently Asked Questions
Is inflation always bad? ▼
Not necessarily. Low, stable inflation (around 2%) is often a sign of a growing economy. It encourages people to spend and invest rather than hoarding cash. Deflation (falling prices) is often considered worse because it leads to economic stagnation.
How can I protect my money? ▼
Historically, keeping cash in a savings account loses money to inflation. To beat it, investors typically put money into assets that grow faster than inflation, such as the stock market (average 7-10% returns), real estate, or inflation-protected bonds (TIPS).