My uncle worked for the same company for 22 years and received a 3% raise every year without exception. He thought of it as a reliable annual reward. What he didn’t realize, and didn’t calculate until he retired, was that for most of the 2020s his 3% raise was a pay cut in real terms, because prices were rising faster than his paycheck.
$100 in January 2020 now requires about $125 to buy the same things in mid-2026. That’s a 25% cumulative erosion in purchasing power over six years, compounding quietly in the background while most salary conversations focus on the percentage column in an offer letter.
The inflation rate for the 12 months ending May 2026 was 4.2%, according to the Bureau of Labor Statistics CPI report released June 10, 2026. The month before that, it was 3.8%. The trend is moving in the wrong direction for people on fixed or slowly growing incomes.
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What a 4.2% inflation rate actually means
An annual inflation rate of 4.2% means that a basket of goods and services that cost $1,000 last year now costs $1,042.
That sounds manageable in isolation. The problem is that inflation compounds like interest, just in the wrong direction for consumers. At 4.2% annual inflation sustained over three years, prices rise by roughly 13%. At that rate sustained over five years, prices are up about 23%.
The categories driving current inflation vary month to month, but shelter, insurance premiums, and food away from home have been persistent contributors in 2025-2026. Goods prices have moderated; services inflation has been stickier.
The salary math most people don’t run
Here’s a calculation worth doing with your actual numbers:
Take your 2020 salary and increase it by the cumulative inflation rate since then.
The BLS reports cumulative price increases of roughly 25% from January 2020 through mid-2026. That means if you made $60,000 in January 2020, you need to be making about $75,000 today just to have the same purchasing power. Not more than you had before. Exactly the same.
If your salary has increased from $60,000 to $70,000 over that period (a 16.7% increase), you’ve actually lost purchasing power despite getting raises. You can buy less with your paycheck today than you could in 2020, even though the number on your paycheck is higher.
This matters a lot for:
Salary negotiations: “I’d like a 4% raise” means different things in a 2% inflation environment versus a 4.2% one. In the first, it’s a 2% real increase. In the second, it’s essentially flat in real terms.
Fixed-income or slowly-adjusting income: Retirees on fixed income, anyone on a fixed pension, or fixed-rate annuity holders are experiencing real income erosion in the current environment.
Savings and emergency funds: Cash sitting in a 1% savings account in a 4.2% inflation environment is losing purchasing power at 3.2% per year. At that rate, $10,000 in a low-yield account loses about $1,500 in real value over five years.
Inflation vs investment returns: the right comparison
People talk about investment returns without adjusting for inflation, and this leads to misleading conclusions.
A 7% annual return in the stock market sounds great. In a 4.2% inflation environment, the real return is about 2.7%. Still positive, but less impressive, and that’s before taxes.
A high-yield savings account earning 4.5% currently (the top online bank range in June 2026) is actually generating a small positive real return right now: 4.5% minus 4.2% inflation = 0.3% real. That’s not exciting, but it’s not losing ground.
A 5-year CD locked at 3.8% a year ago is now losing purchasing power in real terms, since inflation has risen above that rate.
The inflation calculator doesn’t just tell you what your money is worth today. It helps you evaluate whether any given savings or investment choice is actually keeping pace with what things cost.
Real scenarios where inflation math changes the decision
Scenario 1: Annual salary review Someone gets a 3% raise in a year when inflation is 4.2%. They’re earning more dollars but can afford less. The more useful negotiation frame: “Inflation has been running at 4.2%. I’m asking for a 5.5% increase to get a 1.3% real raise, which I think reflects what I’ve contributed this year.” That’s a conversation with math behind it.
Scenario 2: Long-term rental income A landlord who locked a long-term tenant at $1,500/month in 2018 is collecting about $1,180 in real 2026 purchasing power, meaning the landlord is effectively collecting less rent than they were in real terms, even though the nominal rent hasn’t changed.
Scenario 3: Emergency fund target Someone set a goal of $15,000 as a 6-month emergency fund in 2021. Use the savings goal calculator to recalculate your target based on your current monthly expenses, not the number you set years ago. Their monthly expenses were $2,500. By 2026, their monthly expenses have risen to $2,950 due to inflation (roughly 18% increase). The old $15,000 target is now only 5 months of expenses. The emergency fund needs to be recalculated with current expenses.
Scenario 4: Retirement projection A retirement projection done in 2022 that assumed 2.5% inflation annually was modeling a future that didn’t materialize. If you’re projecting how much you need for retirement using pre-2022 inflation assumptions, your projections are optimistic. Run them again with 3.5-4% inflation. Check what changes.
What the inflation calculator actually does
The calculator at Worth It Calculators is simple. You put in an amount, a starting year, and an ending year. It shows you:
- The equivalent purchasing power in the ending year
- The cumulative inflation rate over that period
- Whether a specific income, savings balance, or investment return has kept pace
I built it because I kept having conversations where people were doing the math wrong, comparing nominal numbers without adjusting for what those numbers actually bought. You can’t evaluate whether a salary increase is real without knowing what inflation was. You can’t evaluate whether your savings are “growing” without knowing what inflation is doing to their purchasing power.
Common mistakes when thinking about inflation
Ignoring “core” vs “headline” CPI: Core CPI excludes food and energy, because those prices are volatile. Headline CPI includes them. If you’re trying to understand your grocery and gas spending, headline is more relevant. For long-run planning, core is often more stable and useful.
Assuming your personal inflation rate matches the published rate: The CPI measures a basket of goods consumed by a hypothetical average household. If you drive a lot, your personal inflation rate when gas prices spike is higher. If you own your home outright, you don’t experience housing cost inflation the same way a renter does.
Forgetting to inflation-adjust old decisions: “I bought this house for $200,000 and sold it for $280,000, so I made $80,000.” Maybe. But if you held it for 10 years through 30%+ cumulative inflation, the $200,000 you invested is worth about $260,000 in today’s dollars just to break even in real terms.
FAQ
How is inflation calculated? The Bureau of Labor Statistics surveys prices on a basket of goods and services each month and compares them to the prior period. The percentage change is the CPI inflation rate. The specific basket is updated periodically to reflect how people actually spend money.
How does inflation affect fixed-rate loans like mortgages? Inflation is actually good for existing fixed-rate debt. If you borrowed $300,000 at 3.5% and inflation is running at 4.2%, the real cost of your debt is declining. You’re repaying the loan in dollars worth less than the dollars you borrowed.
What’s a reasonable inflation assumption for long-term financial planning? The Fed’s target is 2% annually, which they haven’t consistently hit since 2021. For conservative long-term planning, many financial planners currently use 3-3.5%. Given recent experience, that caution seems warranted.
The bottom line
Inflation is the thing that quietly erodes the value of money that isn’t moving. Savings in low-yield accounts, fixed incomes, long-term contracts priced years ago: all of these are affected by whether the purchasing power of those dollars keeps pace with what things actually cost.
The calculator isn’t trying to predict where inflation goes from here. It’s for running the math on where you are right now.
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Worth It Calculators provides educational tools and general information. We are not licensed financial advisors. Always consult a qualified professional before making major financial decisions. Some links may earn us a commission at no extra cost to you.
See exactly how inflation has eroded your purchasing power: Inflation Calculator