Purchasing power: the same amount can buy less
If the number in a budget stays unchanged while prices rise, is the budget unchanged? In nominal terms, yes. What it can buy is different. That creates two useful answers which should not be mixed together.
Two opposite questions, not contradictory results
First: how much future money would buy what today’s amount buys? Multiply today’s amount by the price-change factor. Second: what is a fixed future nominal amount worth in today’s purchasing power? Divide it by that same factor.
When prices rise, the first answer increases and the second decreases. The distinction between nominal money and price-adjusted value underlies purchasing-power comparisons. A clear time reference matters more than a percentage without a label.
References: BLS: purchasing power and constant dollars · BLS: income and the Consumer Price Index
Do not simply subtract the inflation percentage
If a basket costing 100 now costs 110, an amount of 100 buys 100 ÷ 110 of the original basket, or about 90.91%. Purchasing power falls by about 9.09%, not 10%, because the denominator has changed.
For a constant annual rate over several years, compound the changes: the price factor is (1 + rate ÷ 100) raised to the number of years. Adding annual rates is only an approximation here, not an equivalent compound calculation.
References: BLS: purchasing power and constant dollars
An assumption is not an observed inflation series
ToolRoof uses a rate entered by the user, not a retrieved historical series or official forecast. A constant assumed rate does not mean every item in your budget will rise equally. A consumer price index represents a basket, not each individual household’s exact bill.
When comparing budgets, keep the period and the type of amount consistent. Do not mix monthly and annual income, or amounts before and after deductions. This is also not an investment-return calculation: no investment yield is entered in this model.
References: BLS: income and the Consumer Price Index
A 2400 budget with an assumed 5% annual rate for two years
The price factor is 1.05 × 1.05 = 1.1025. A purchase costing 2400 would require 2646 after two years under this assumption. That is a cumulative price increase of 10.25%.
If the nominal amount remains 2400, its purchasing power in starting-period money is about 2176.87, a fall of roughly 9.30%. This does not predict that inflation will be 5%; it describes the arithmetic consequence of the assumption you supplied.