The math of shrinking money
At inflation rate r, the purchasing power of a fixed amount after t years is Value ÷ (1+r)t. At 2.5% — near many central banks' targets — $50,000 buys only about $30,500 worth of today's goods in 20 years. At 5%, it is roughly $18,800. Small-looking rates compound into large erosion because inflation never takes a year off.
Why this matters for your plans
- Retirement targets: "I need $1 million" is incomplete without asking in whose dollars? A million in 30 years at 2.5% inflation is about $477,000 today. Plan in real terms or plan twice.
- Cash holdings: money earning 0.1% in a checking account loses purchasing power every single day. The gap between your interest rate and inflation is your real return — often negative for idle cash.
- Salary negotiations: a raise below inflation is a pay cut with better marketing. Anchor negotiations to real, inflation-adjusted terms.
What rate should you assume?
Most developed-economy central banks target about 2%; the long-run US average since 1926 is a bit above 3%, with violent exceptions (the 1970s, 2021–2023). For planning, 2.5–3% is a defensible baseline, and testing your plan at 4–5% shows how fragile it is to bad decades. The point of the exercise is not prediction — it is making sure your plan survives realistic futures.