How would you figure the cost of something in the future including inflation?

Question

Looking for an excel formula that can calculate the cost of something based on a current price that factors in price increases and inflation.

For example a plane ticket cost (econ LAX to JFK) in 30 years.

Answer 1

If you assume a specific inflation rate per year (x%), the price in a year will be (100+x)% times the current price. The price in two years will be (100+x)% of the price in one year, and in 30 years the price will be (100+x)% raised to the 30th power times the current price. (Clarified the wording.)

Now all you need to do is find a way to predict what inflation will look like over the next 30 years, and guess how other factors (improved technology, higher fuel prices, and so on) will affect the price of the item you're trying to analyze.

That's an oversimplification, of course, since the inflation rate will vary from year to year. The usual solution is Monte-Carlo modelling: Set up a simulation with what you consider reasonable amounts/distributions of random variation in all the key variables, and run it enough times to give you some statistical confidence that you know what the probability distribution looks like... and that's the closest thing to a meaningful answer you're likely to get.

If anyone could predict a specific number accurately, they'd make a fortune. Since we can't, it all comes back to applying your own best judgement about what risks are acceptable.

Answer 2

The Excel formula would be, with the initial price in A1 (say 200) and the inflation rate in A2 (say 0.03 or 3%):

=A1 * (1 + A2) ^ 30

As already noted, that is probably not a very realistic model.