See how much you'll need in the future to match today's purchasing power — and how inflation silently erodes wealth.
How Inflation Erodes Purchasing Power
Inflation is the rate at which the general level of prices rises over time. When inflation is 3% per year, something that costs $100 today will cost $103 in a year, $134 in ten years, and $181 in twenty years.
The Inflation Formula
FV = PV × (1 + rate)^years
This tells you how much money you will need in the future to have the same purchasing power as PV today. The purchasing power loss is: 1 − 1/(1 + rate)^years.
Inflation in Australia
The RBA targets CPI inflation of 2–3% over the medium term. Over the past 30 years, average Australian inflation has been approximately 2.5%. The 2021–23 spike to 7–8% was the highest since the early 1990s and prompted the sharpest interest rate cycle in a generation.
Real vs Nominal Returns
When evaluating investments, the real return (after inflation) matters more than the nominal return. A term deposit earning 5% with 3% inflation delivers a real return of only ~2%. Shares historically deliver 7–9% nominal, or 4–6% real — well ahead of inflation over long periods.
Frequently Asked Questions
What is the current inflation rate in Australia?
Australia's CPI inflation peaked at around 7–8% in 2022–23 and has since fallen back toward the RBA's 2–3% target band. For long-term planning, using 2.5–3% is a reasonable assumption.
How does inflation affect my savings?
Inflation erodes the purchasing power of money over time. If your savings earn less than the inflation rate, your real wealth is shrinking even if the nominal balance is growing. A high-interest savings account at 4.5% with 3% inflation gives a real return of about 1.5% per year.
What is the RBA inflation target?
The Reserve Bank of Australia targets CPI inflation of 2–3% on average over the medium term. This target has been in place since the early 1990s. When inflation is above the band, the RBA typically raises interest rates to slow the economy.
How do I protect my savings from inflation?
Keep savings in a high-interest account (currently 4–5%), consider shares and property which historically outpace inflation over the long term, and avoid holding large amounts of cash for extended periods. Superannuation invested in a growth option is a tax-effective inflation hedge.
What does purchasing power mean?
Purchasing power is the real value of money — what it can actually buy. If inflation is 3% per year, $100 today will only buy the equivalent of $97 worth of goods in one year. Over 20 years at 3%, that $100 has the same purchasing power as $181 in future dollars.