The chart on the left illustrates how inflation changes drastically over time.  While the past two decades average around 3%, you can see that there were decades where inflation was a lot higher.

Inflation eats away at the purchasing power of people's money.  For example, if inflation is 3% and a product costs $100, than next year the same product will cost $103.

When calculating how much you earn on your investments, you really want to know how much you've earned above inflation.  This is known as the real rate of return and it is calculated by this equation:

So if you have made 6% on your investments and inflation was 3%, you actually only made 2.9126% on your investment.  Inflation eroded the rest.

 Visit our Site Map