What is inflation, and why does your savings account feel it?
In short
- Inflation means things get more expensive on average, so your money buys less.
- If your money stands still and prices rise, it buys less over time.
- Interest on savings can offset that partly or fully, or not.
Inflation is the average rise in prices of everything we buy: groceries, rent, energy, a cup of coffee. If inflation is 2 percent a year, what costs 100 euros now costs on average 102 euros in a year.
What that does to your savings
Suppose you leave 10,000 euros in an account without interest, with inflation at 2 percent a year. After ten years there are still 10,000 euros in the account. But what you can buy with it is worth roughly 8,200 euros of today. The amount is the same, the purchasing power is lower.
You can check this yourself: divide the amount by 1.02, ten times in a row. On our calculators page you can do this with your own numbers.
Interest works the other way
If you earn interest on your savings, the amount grows. If the interest is higher than inflation, your purchasing power rises. If it is lower, you lose purchasing power, even though the amount goes up every month. The comparison between the two is called the real interest rate.
What it is not
Inflation is not a prediction that everything gets more expensive for everyone, and not every price rises equally fast. The figure is an average and your personal inflation can differ. This explanation is not advice on where to keep your money.
