Question 1

What does this calculator show?

Accepted Answer

In 'Erode purchasing power' mode, you enter an amount you hold today (for example, cash savings or a pension pot) and see what it will buy in future years. Inflation steadily reduces the real value of a fixed sum. In 'Future target in today's money' mode, you enter a future amount (for example, your retirement income target) and see what that represents in today's terms. Both modes help you understand whether your savings are keeping up with the cost of living.

Question 2

What inflation rate should I use?

Accepted Answer

The Bank of England's target is 2% per year. Actual UK CPI has averaged around 2.5-3% over the last decade, with a period of much higher inflation (7-11%) in 2022-2023. For long-term financial planning, 2-3% is a reasonable base case. For a more cautious plan, use 3-4%. The ONS publishes official UK CPI and RPI data if you want to use a specific historical rate.

Question 3

What is the difference between CPI and RPI?

Accepted Answer

CPI (Consumer Prices Index) is the main measure of UK inflation, targeted by the Bank of England. RPI (Retail Prices Index) is an older measure that includes housing costs such as mortgage interest payments. RPI has historically run about 0.5-1% higher than CPI. Many pension increases, rail fares, and student loan interest rates are still linked to RPI, so it remains relevant for planning purposes.

Question 4

How does inflation affect my pension?

Accepted Answer

Inflation is one of the biggest risks to retirement savings. If your pension pot is £300,000 and you expect to retire in 20 years, inflation at 2.5% means you will need around £490,000 in nominal terms to have the same purchasing power. This is why pension projections typically show both a nominal and a 'real terms' (inflation-adjusted) figure. Choosing investments that grow above inflation is crucial for long-term financial security.

Question 5

Does inflation affect cash savings?

Accepted Answer

Yes. If you hold cash earning less interest than the inflation rate, your money loses real value every year. For example, if inflation is 3% and your savings account pays 2%, you are losing 1% of purchasing power annually. This is sometimes called a 'real negative return'. To preserve purchasing power, your savings need to earn at least as much as inflation after tax.

Year	Real Value	Purchasing Power Lost
1	£9,756	£244
2	£9,518	£482
3	£9,286	£714
4	£9,060	£940
5	£8,839	£1,161

Inflation Calculator

Inflation details

Purchasing power summary

Year-by-year purchasing power

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