Compounding and inflation

Compounding the effect of inflation on the cost of living

Inflation provides us with a measurement which represents the average change in the cost of living.

Inflation is typically measured using CPI, or the consumer price index. Over the past decade, inflation has averaged about 3% per annum.

What this means is that it costs 3% more to live each year as goods and services increase in price (please note this is the average increase, and could be different in any one year).

The table on the right shows how inflation influences one family’s living costs, when compounded year on year.

As shown in the table, if it costs you $35,000 per annum to live this year, that same lifestyle is likely to cost about $45,000 per annum after nine years, if inflation runs at 3% per annum.