Updated 2026-09-27 · Global · General education

What changed: the money or what it buys?

A basket costing $100 today costs $103 next year. That is 3% inflation. If you still have $100 in your account, the number of dollars has not fallen. What those dollars can buy has changed.

Equal amounts of money buy progressively smaller baskets when prices rise.

What inflation really means

Prices rise. The same money buys less. Illustrative, USD.

Compare what the same $100 buys today, 10 years later and 20 years later.

Today: $100
10 years later: $100
20 years later: $100
3% annual inflation

Illustrative example: the same basket costing $10,000 today costs $13,439 after 10 years at 3% annual inflation.

Purchasing power falls

Same money, smaller basket.

At illustrative inflation of 3%, a basket costing $100 today costs $103 next year. The number of dollars and what they buy are different measures.View full size

Nominal value and purchasing power

Nominal value is the number on the statement. Purchasing power is the goods and services that number can pay for. Cash is useful for stability and access, but a long-term goal also needs a view on rising prices. Interest can offset some inflation; it is the relationship between the two that matters.

Nominal returns measure money growth; real returns also account for changing prices.

Nominal return vs real return

What inflation changes

Inflation raises prices
Nominal growth

Nominal growth — Illustrative

Real purchasing power

Real purchasing power — Illustrative

7% nominal return; 3% inflation; 3.88% real return

Illustrative annual example: 7% nominal return, 3% inflation, 3.88% real return.

Today: $100 — Same basket
Next year: $103 — Same basket
Real return equals (1 + nominal return) divided by (1 + inflation), less 1. Subtracting inflation is only an approximation.View full size

Your own basket may change differently

Food, rent, school fees, travel and healthcare do not all rise at the same rate. Education planning separates tuition and living-cost inflation. Retirement planning links today’s monthly spending to a future income need.

Test a range

Use a lower and a higher inflation assumption as well as your starting estimate. This helps show which decisions are sensitive to rising costs without pretending to predict them.

For information and guidance only. Results are illustrative, based on your assumptions, and are not personalised financial advice. Methodology & limitations