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Basics3 min readUpdated April 14, 2026

Inflation

By Horizons Editorial TeamMethodology

Educational information, not individual financial advice.

Key Takeaways

Inflation is the gradual loss of purchasing power over time
3% inflation cuts purchasing power in half every 24 years
Your investment returns must beat inflation to grow in real terms

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The headline number
Why inflation happens
Why it matters for your plan
Not all prices inflate equally
How Horizons uses this

Inflation is the slow reduction in what a dollar can buy. A dollar in 2000 bought about twice as much as a dollar in 2026. This effect is quiet, automatic, and more consequential than almost any single financial decision you'll make.

The headline number

Long-run average inflation in the United States has been about 3% per year since 1926. Short-run inflation varies — it was under 2% for most of the 2010s, spiked to 9% in 2022, and has been settling back toward 2–3% through 2025–26.

At 3% inflation:

A $5 cup of coffee today costs about $6.72 in 10 years.
A $300,000 home today would be priced at about $543,000 in 20 years, in nominal terms.
A $60,000 salary today has the purchasing power of about $33,000 in 20 years if it never gets a raise.

Annual inflation by category (long-run U.S. averages)

Headline CPI~3.0%14%

Healthcare~5.3%25%

Education~5.0%24%

Housing~3.2%15%

Food~2.8%13%

Electronics~–1.5%7%

Spending by category.
Category	Value	Share
Headline CPI		14%
Healthcare		25%
Education		24%
Housing		15%
Food		13%
Electronics		7%

BLS long-run averages. Categories with structural tailwinds (education, healthcare) run hot; goods with productivity gains (electronics) deflate.

Why inflation happens

Inflation has multiple causes, and economists debate which dominates in any given year:

Demand-pull — too much money chasing too few goods (post-COVID stimulus + supply shortages).
Cost-push — input costs rise and producers pass them on (energy shocks, labor costs).
Monetary — the money supply grows faster than the economy.
Expectations — if everyone expects prices to rise, wages and contracts are set accordingly, making it self-fulfilling.

The Federal Reserve's main job is to keep inflation around 2% per year by adjusting short-term interest rates.

Why it matters for your plan

Inflation erodes the real value of any dollars that don't grow. Money in a checking account earning 0.1% loses about 2–3% of its real value every year. A pension or annuity that isn't inflation-adjusted pays the same nominal amount 20 years from now — buying roughly half as much.

Three assets that historically beat inflation over long periods: stocks (long-run real return ~7%), real estate, and TIPS (Treasury Inflation-Protected Securities, which adjust automatically).

Rule of 72 for inflation

Divide 72 by the inflation rate to get the years it takes purchasing power to halve. At 3%, that's 24 years. At 6%, it's 12. At 2%, it's 36. A retirement plan that ignores inflation effectively assumes your future self will live on half the real income you do today.

Not all prices inflate equally

Headline inflation (CPI) is an average across a basket of goods. Different categories inflate at different rates:

Healthcare and education have historically outpaced headline CPI by several percentage points per year.
Technology and electronics often experience deflation — TVs and computers get cheaper over time.
Housing tracks CPI in the long run but varies wildly by metro.
Food and energy are the most volatile.

Good retirement planning uses category-specific inflation for expenses that diverge from the headline — especially healthcare.

How Horizons uses this

Every expense category in Horizons has its own inflation rate. Healthcare expenses grow faster than food, which grows slower than housing. Your Monte Carlo simulations also include year-to-year inflation surprises as a correlated market factor — a high-inflation year hits bond returns and simultaneously raises your expenses, the way it does in reality.

Checkpoint

A retiree models $70,000/yr of expenses in today's dollars. They use a flat 2.5% inflation assumption. Which category is MOST likely to leave them short 20 years in?

Try it in your scenario

Your category-specific inflation rates

Known limitations

Dormant expenses skip inflation (EI-22)
Rate convention (EI-21)

Sources

Educational information distilled from the Horizons engine methodology — not individual financial advice.

Quick check

A quick self-check, just for you — no score, nothing saved beyond your own progress.

Checkpoint

Using the Rule of 72, about how long does 3% inflation take to cut purchasing power in half?

Checkpoint

A pension pays a fixed $40,000/yr that never adjusts for inflation. After ~24 years of 3% inflation, what has happened in real terms?

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