If you remember when a coffee or a bus ticket was cheaper, you already know what inflation is.
The idea in one sentence
Inflation is the general rise in prices over time. When prices rise, the same amount of money buys less than before.
A simple example
Say prices rise by 3% a year. Something that costs 100 today would cost about 134 in 10 years.
Or turn it around: in 10 years, 100 would buy only as much as about 74 buys today. After 20 years, it would buy only as much as about 55 buys today.
The money is still 100 on paper. What changed is what you can buy with it. This is called a loss of purchasing power.
Why does this matter for savings?
Money kept in a place that pays no interest slowly loses buying power when prices rise. If your savings earn 1% but prices rise 3%, your money still grows on paper, but it can buy less each year.
That is one reason people look at ways of saving and investing that aim to grow faster than prices. Those options have their own risks, which is a topic for other guides.
Is inflation always bad?
Not necessarily. Most economies aim for a small, steady amount of inflation. Very high inflation causes real problems, and so can falling prices, so the goal is usually “low and stable”.
How is it measured?
Governments track the prices of a typical “basket” of everyday things, such as food, rent, transport and energy, and report how much the total changes over time. The numbers differ between countries and years, so always look up the current figure for your own country.
What to take from this
- Prices usually rise over time, even if slowly.
- The longer the time, the bigger the effect.
- Look at what your money can buy, not only at the number in your account.
Try your own numbers with the inflation calculator.