What is inflation?

Inflation: The average rise of prices. At 2 percent inflation the same money buys about 2 percent less after a year.

With inflation, groceries, energy and other things become more expensive on average. The same amount of money then buys less. That is called buying power.

Central banks such as the ECB aim to keep inflation around 2 percent. When inflation is higher, they often raise interest rates to slow the economy down.

For savers the gap between the savings rate and inflation matters most. If inflation is higher than the rate, your savings lose buying power.

Example
Say inflation is 2 percent a year for ten years. What costs 1,000 euros now will cost about 1,219 euros. The other way round, after ten years 1,000 euros buys about as much as 820 euros buys today.

Watch out
The official figure is an average. Your own spending can become more expensive faster or slower than that.

Read more in the guide What is inflation, and why does your savings account feel it?.

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