What is the Purchasing Power?
Purchasing power is what money actually buys, not its face value. Inflation erodes it silently: at 4% a year, money loses roughly half its value in 18 years.
This is why holding large cash balances is risky rather than safe. Cash preserves the number but steadily destroys the value.
Formula & worked example
Amount needed later = Amount × (1 + inflation)years
Worked example: 100,000 held as cash for 20 years at 4% inflation retains only 45,639 of purchasing power — a 54% loss. You would need 219,112 in 20 years to buy what 100,000 buys today. Invested at 7%, the same amount grows to 386,968, worth about 176,600 in today's money.
How to use this purchasing power calculator
- Enter the amount you hold today.
- Use 3–4% for long-run developed-market inflation, higher for emerging markets.
- Set the time horizon.
- Compare against investing to see the real cost of holding cash.
Smart tips
- Cash is not risk-free — it carries a guaranteed real loss whenever inflation exceeds your interest rate.
- Keep only your emergency fund in cash; beyond that, inflation is the dominant risk.
- Salary that rises below inflation is a real pay cut, even though the number goes up.
- Inflation-linked bonds and equities are the main long-run defences against purchasing power erosion.
- Retirement plans built on nominal figures dramatically overstate future comfort — always convert to today's money.
Frequently asked questions
How does inflation affect my savings?
It erodes what they buy. At 4% inflation, money loses about half its purchasing power in 18 years, even though the balance is unchanged.
What inflation rate should I assume?
2–3% for developed markets long-run, 4–6% for many emerging markets. Using the recent past alone can mislead in either direction.
Is cash safe?
It is stable in nominal terms but guarantees a real loss whenever inflation exceeds interest. Safety and value preservation are different things.
How do I protect against inflation?
Equities historically outpace inflation over long periods. Inflation-linked bonds, property and commodities also provide some protection.
Want the theory behind the numbers? Read our inflation guides on the Money Blog.
Written by Gurjeet Singh, Sharpen Solutions. Last reviewed 8 Sep 2026. How we check these numbers.