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Adjusting for inflation

Posted on 2015-02-17
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Last Modified: 2015-03-08
What are the calculations necessary to adjust a particular dollar value for inflation?

E.g. I have $A in today's dollars. 35 years from now, assuming inflation is 2.5%, that will be like having $X

And the reverse:

E.g. I anticipate that my investment portfolio will have a value of $B in 35 years. Assuming 2.5% inflation, that's $Y in today's dollars

Is it just as simple as X = A * (1.025^35), and Y = B / (1.025^35) ? Or is it more complicated than that?
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Question by:Frosty555
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6 Comments
 
LVL 84

Expert Comment

by:ozo
ID: 40615580
$X=$A*(1+2.5/100)^35
$B=$Y*(1+2.5/100)^35
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Brad Rubin earned 250 total points
ID: 40615616
You should be using finance calculations for both Future Value and Net Present values. These are prepackaged calculations in Excel. You can also find them in the Finance formula sections in the formula builder.

Example:
=FV(2.5%,35,0,-$A)
=PV(2.5%,35,0,-$B)
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Assisted Solution

by:nickg5
nickg5 earned 250 total points
ID: 40616606
Inflation the last two years has been around 1.7 to 1.8%

There are simple compound interest calculators which take less time than maybe even opening Excel.

Here is one and I made up numbers:
$30,000 savings
30 years
compounded yearly at 2.5%
After 30 years your $30,000 would be $62,927.

You can change the numbers as you like.
http://www.csgnetwork.com/interestcomplexsavcalc.html

p
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Author Comment

by:Frosty555
ID: 40622060
So you can treat inflation calculations the same way you would treat a compound interest calculation?
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Expert Comment

by:ozo
ID: 40622289
Modulo whether percentage is reported as nominal APR, effective APR, APY, AER, and which index is used to measure inflation
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Expert Comment

by:nickg5
ID: 40652913
Here is a great article on how to calculate inflation.
http://inflationdata.com/inflation/Inflation_Articles/CalculateInflation.asp

The rate of inflation that the U.S. government calculates decides the cost of living raises for retired people, etc.
Last year the rate was calculated to be 1.7%
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