Inflation shows the effect of inflation on the purchasing power of a future $ amount in today's $ after a number of years at a estimated annual inflation rate. This provides some perspectives on the question 'What lifestyle will my accumulated savings support at some point in the future?' by bringing the future $ amount back to today's equivalent $ in the context of today's prices. The parameters for Inflation are:

Example: To calculate the effect of inflation on the purchasing power of $1000 today after 25 years of 3% annual inflation compounded annually:

1. Select the (Inflation) tab and then the (Future Value) tab.

2. Enter "1000" into the {Value Today} field, "1" into the {Compoundings/Yr} field, "3" into the {Annual Inflation Rate} field, and "25" into the {Number of Years} field.

3.Click on the [Compute Future Value] button to display $477.61 in the {Future Value} field. This means that $1000 twentyfive years in the future will purchase the same as $477.61 does today if inflation averages 3% annually over this period.

The calculated total number of compoundings (# compoundings/yr x # years) is limited to a range of 0.50 -10,000,000. If the chosen parameters in the Compoundings/Yr tab result in total # compoundings outside this range an error message is displayed.

The Compoundings/Yr parameter is included primarily for symmetry with the other calculations. The other Inflation parameters are not particularly sensitive to changes in the number of times inflation is compounded in a year. That is, it makes little difference if 3% annual inflation is calculated as 3% once each year, or 0.25% 12 times each year. In the example above, changing the Compoundings/Yr to "12" (monthly) reduces the purchasing power only by $4.80 to $472.81. Conversly, however, the Compoundings/Yr calculation in the middle tab is very sensitive to small changes in the remaining parameters, and finding a particular meaningful value within the total number of compoundings limit may prove tedious.

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