Two questions, one calculation
- Equivalent later: you need this much in ten years to buy what 100,000 buys today.
- Purchasing power: 100,000 kept under the mattress will buy this much in ten years.
Both come from the same compounding factor, and confusing them produces conclusions that are wrong in the opposite direction.
The rule of 72
Divide 72 by the inflation rate to get the years until prices double. At 6% that is 12 years; at 8%, nine; at 12%, six. It is close enough for mental arithmetic and makes long horizons intuitive in a way a percentage does not.
Why cash is not neutral
Money held at zero interest during inflation loses value at exactly the inflation rate. That is not a risk of loss, it is a certainty — the only question is the size. Seeing the purchasing-power figure for a decade is the clearest argument for why a savings rate below inflation is a slow loss rather than a safe choice.
Questions
What is the difference between the two main figures?+
The equivalent is what you would need later to buy what the amount buys today. The purchasing power is what today's amount will actually buy later. One goes up, the other goes down, and they answer different questions.
Which inflation rate should I use?+
Whatever applies to what you buy. Official figures are a basket average; if your spending is mostly rent and food, your personal rate can differ substantially. For a long-term projection, a rate somewhere near the historical average of your currency is more honest than the latest month.
Does compounding matter over ten years?+
Enormously. At 8%, prices roughly double in nine years. Multiplying by 8% × 10 = 80% understates it by a fifth, because each year's inflation applies to the already-raised price.
Does this predict inflation?+
No. It applies a constant rate you choose. Nobody knows the real path, and small changes in the assumed rate produce large differences over decades — which is itself the useful lesson.