What is inflation?

Inflation is the phenomenon of an increase in the general price level of goods and services in an economy over time. When inflation occurs, the purchasing power of money decreases, meaning that the same amount of money can buy fewer goods or services than before.

Inflation calculation formula

To calculate the future value of money affected by inflation, we use the compound interest formula:

Vf = Vi × (1 + r/100)^(t₂ - t₁)

In which:

• VfFuture value
• ViInitial value
• rAnnual inflation rate (%)
• t₂ - t₁Time period (years)

Calculation

To calculate the value after inflation:

1. Determine the initial amount of money.
2. Determine the annual inflation rate.
3. Determine the time period.
4. Apply the above formula to calculate the future value.

Illustration

Suppose you have 2,000,000 VND in 2023, the average inflation rate is 5% per year, and you want to calculate the future value of this amount in 2028. The future value is calculated as follows:

Vf = 2,000,000 × (1 + 0.05)5 ≈ 2,552,563 VND

This means that in 2028, you will need approximately 2,552,563 VND to purchase the same amount of goods or services as you would in 2023, which cost 2,000,000 VND.

The impact of inflation over time

Inflation reduces the real value of money over time. For example, if average inflation is 3% per year, the value of VND 1,000,000 today will decrease significantly after 10, 20, or 30 years. This affects:

• Purchasing powerYou will need more money to buy the same quantity of goods/services.
• SavingThe real value of savings decreases if they are not invested at an interest rate that exceeds inflation.
• Financial planningInflation needs to be considered when making long-term plans, such as retirement or investments.