Inflation and purchasing power

Inflation is the gradual rise in the price of goods and services. When prices go up, each unit of your currency buys a little less — its purchasing power falls.

The hidden tax on cash

At 5% inflation, something costing 100 today costs about 163 in ten years. Money sitting in a low-interest account loses real value even though the number in your balance doesn't shrink.

The real return

What matters is your real return — return after inflation:

Real return ≈ Investment return − Inflation rate

Earning 6% when inflation is 4% is only about a 2% real gain.

What tends to keep up with inflation

• Equities (shares) over the long run, as companies raise prices and profits.
• Property and some commodities like gold.
• Inflation-linked bonds, whose payouts rise with prices.

Key takeaway

Holding some cash is essential for safety and emergencies. But keeping everything in cash almost guarantees a loss of purchasing power over time — which is a core reason people invest.