At 3% inflation a year, 10,000 buys 44.6% less after 20 years. What costs 10,000 at the start costs 18,061 by then, so 10,000 buys only what 5,537 bought at the start.
Prices compound: each year’s rise applies to prices that have already risen. The cost of the same basket climbs by a little more each year, while the loss of purchasing power grows by a little less each year, because each rise takes its share of a smaller amount.
Year by year
The cost of the same basket, and what the starting amount still buys:
| After (years) | Cost of the basket | What the starting amount buys | Purchasing power lost |
|---|---|---|---|
| 5 | 11,593 | 8,626 | 13.7% |
| 10 | 13,439 | 7,441 | 25.6% |
| 20 | 18,061 | 5,537 | 44.6% |
What the example leaves out
These figures assume prices rise by exactly 3% every year. Real inflation varies from year to year and differs between the things a household buys.