Library · Foundations · 6 minute read · Checked against its sources 2026-09-26
Inflation: the quiet subtraction
A number that grows can still buy less. Real return is what you earned minus what prices did, and the arithmetic is slightly less obvious than subtraction.
My grandfather liked to say what a loaf of bread cost when he was a boy. It was his way of noticing that the number on the price tag and the thing you could buy had drifted apart. Inflation is that drift, measured.
Two kinds of return
The nominal return is how much the dollar figure changed. The real return is how much your buying power changed. If your account rose 7 percent and prices rose 3 percent, your real return was not exactly 4. It was 1.07 divided by 1.03, minus 1, which is about 3.88 percent. At low rates the shortcut of just subtracting is close enough. At high rates it drifts.
Over a long time
At 3 percent inflation, prices double roughly every 24 years. A retirement plan that ends with a million dollars in thirty years, in a world where prices doubled and then some, ends with what feels like less than half a million today. The growth calculator has an inflation box for exactly this reason, and it shows the ending balance both in future dollars and in today's, labeled.
Inflation is measured by an index, in the US most often the Consumer Price Index, which tracks a basket of goods and services. Your personal inflation rate is different, depending on what you buy. Someone whose spending is mostly rent and medical care in a fast growing city has lived something quite different from the headline number. Treasury Inflation Protected Securities and I bonds adjust with the official index, so they protect you from the index, not from your own basket.
Where the tidy version goes wrong
"Cash is safe" is true of the number and false of what the number buys. A savings account paying less than inflation loses real value every year, slowly, without any alarming statement to read. The safety is real in one sense and an illusion in another, and it is worth knowing which one you are buying.
Questions worth asking yourself
What inflation assumption is hiding inside any long term projection you are looking at? What did your own biggest costs do over the last five years? And which of your holdings adjust with inflation, and which are fixed in nominal dollars?
Sources
Bureau of Labor Statistics, Consumer Price Index
Related
Compounding, and why the early years look boring
Bonds and Treasuries: lending money, with a price that moves
Ask about this guide
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Written by one person and checked against the sources above; no outside expert has reviewed it yet. Rules and dollar limits change every year, so this guide explains how things work and sends you to the official source for this year's numbers.