What is the meaning of the inflation formula?

The inflation formula shows the relationship between the costs of goods and services today versus in the future based on a given inflation rate. It is used to calculate the future cost of an item or expenditure if prices increase at a consistent annual inflation rate.

The formula is:

Future Cost = Present Cost x (1 + Inflation Rate)^Number of Years

Let’s assume the inflation rate is 6%. Then, let’s calculate 1 Lakh in the next 10 years.

Using the formula: Future Cost = Present Cost x (1 + Inflation Rate)^Number of Years

We have:

Future Cost = 1,00,000 x (1 + 0.06)^10

Future Cost = 1,00,000 x (1.06)^10

Future Cost ≈ 1,79,084.79

This formula quantifies the compounding impact of inflation over time. With a consistent inflation rate, prices do not rise at that fixed rate yearly. Instead, inflation compounds, causing the price increase in each subsequent year to be applied on top of the previous year's inflated price.

This helps illustrate why even modest annual inflation can greatly erode purchasing power over long horizons if prices are unchecked.