Inflation Calculator

In the world of personal finance, there are two types of inflation calculator:

  • Forward looking
  • Backward looking
The most common use of "forward looking" calculators is for retirement planning. When someone asks you "what's your number", their essentially asking you how big your retirement fund needs to be...adjusted for future inflation.

Backward looking calculators are the basis for all forward looking calculators. What I mean is that everyone quotes an average rate of inflation (typically 3% per year), which is just the historical average.

How is Historical Inflation Measured?

By now, you're probably wondering what "too low", "too high", and "moderate" really mean. These meanings are all relative, and that is part of the problem people have when discussing the causes of inflation.

The the Bureau of Labor Statistics (BLS) collects price information on a list of 80,000 or so products/services every month (sort of like looking through advertisements and recording prices every week).

They average these prices together and come up with a total number called the consumer price index (CPI). The CPI is a measurement of how much things cost.

By calculating the change in CPI, the BLS can determine the inflation percentage.

Recent Changes to Consumer Price Index

Impact of Government Changes to the Calculation of Inflation

Since the government changes the formulas used to calculate CPI to suit their needs, making apples to apples comparisons over long periods of time is difficult.

By changing the "math", the causes of inflation are also more difficult to figure out.

But as a rule of thumb, when the CPI increases, we are experiencing inflation.

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