Prices tend to rise over time, and this quietly changes what a fixed sum of money is worth. Inflation arithmetic is simple enough to do by hand, and doing it once makes headlines about price rises much easier to interpret.
Two views of the same fact
If prices rise 6% in a year, something that cost ₹100 now costs ₹106. Looked at the other way, ₹100 now buys about 94 rupees’ worth of what it bought a year ago (100 ÷ 1.06 = 94.3). Both statements describe the same event. The first is about prices, the second about purchasing power.
The formulas
- Future price = price now × (1 + inflation rate)^years
- Purchasing power of a sum = sum ÷ (1 + inflation rate)^years
An illustration with an assumed rate
Assume a steady 6% inflation for 10 years. This rate is chosen for round arithmetic; actual inflation varies from year to year and is reported by official statistics.
- An item costing ₹100 would cost 100 × 1.06^10, about ₹179.
- ₹100 held in cash would buy what ₹55.84 buys today (100 ÷ 1.79). In other words, it would have lost about 44% of its purchasing power.
- A monthly household expense of ₹30,000 would become about ₹53,700 to buy the same things.
Real versus nominal
A figure is nominal when it is quoted in the money of the time, and real when it has been adjusted for price changes. If a salary rises from ₹50,000 to ₹55,000 (10%) while prices rise 6%, the real rise is about (1.10 ÷ 1.06) − 1, or 3.8%, not 4%. The approximation of subtracting works for small numbers, but the division is the exact method.
Why this matters for planning
- Long-term costs such as education or retirement spending need to be thought of in future rupees.
- Fixed amounts such as a pension that does not adjust, or a deposit with a fixed rate, lose purchasing power when inflation exceeds the rate earned.
- Comparing across years needs a price adjustment. A salary or rent from 15 years ago cannot be compared with today’s without it.
Caveats
Inflation indices measure an average basket. Your own inflation can differ if your spending is weighted towards items whose prices move differently, such as fuel, rent or education. A national figure is a guide, not a personal measure. For wider budgeting terms, see money basics for everyday finances.
Real interest: a worked example
A deposit pays a nominal 7% a year, and inflation is an assumed 6%. The real return is (1.07 ÷ 1.06) − 1 = 0.94%, not 1%. If the interest is taxable, the real return after tax can be lower still, even below zero. The point is not that deposits are poor; it is that comparing a rate with inflation shows how much purchasing power is being added, as opposed to merely how many rupees.
Planning for a future cost
Suppose a fictional course costs ₹10 lakh today. If its cost rises at 6% a year, it would cost about ₹24 lakh in 15 years (10 × 1.06^15 = 23.97). At 8% it would cost about ₹31.7 lakh. The gap between the two outcomes, ₹7.7 lakh, comes from a two-point difference in the assumed rate. This is why planning exercises usually try a range of rates, and why a single number should be treated as one case among several.
Different baskets, different inflation
Headline inflation in India is measured through consumer price indices based on a basket of goods and services. Food, housing, fuel, education and health care have different weights and often rise at different rates. If you spend a large share of your budget on items whose prices have risen faster than average, your personal inflation is higher than the headline figure. Looking at the components of an index can be more informative than the single number.
Reading inflation news
- A fall in the inflation rate means prices are rising more slowly, not falling.
- Year-on-year rates compare with the same month last year, so a high base can lower the figure.
- Monthly changes can be seasonal, especially for food.
- Check which index is being quoted: consumer prices, wholesale prices or another measure.
Using a calculator
You can do the sums above with a pocket calculator, using the power key. A web calculator saves time when you want to try several rates or years. Enter an amount, a rate and a period, and note the answer next to the assumptions. Change one assumption at a time to see which matters most.
The result is arithmetic on your inputs. It does not tell you what inflation will be, and it does not recommend any course of action. Its value is in making the effect of time and price changes visible, so you can read both news and your own budget with a clearer sense of scale.
To try your own numbers, a calculator that shows what today’s money would buy later lets you enter an amount, a rate and a number of years and see both the price rise and the fall in purchasing power.
The calculation is arithmetic, not a forecast. Change the inflation rate and see how sensitive the answer is, because that range is more informative than any one figure.
