Inflation and Your Savings

The balance and what it can buy

Inflation is a broad increase in the prices of goods and services, not merely a rise in one product's price. When prices rise broadly, the same money buys less. This ability to buy things is purchasing power. The European Central Bank explains the distinction between a single price change and inflation.

In the euro area, inflation is measured using the Harmonised Index of Consumer Prices, or HICP. It follows a representative basket of goods and services. Items have different weights according to their share of household spending; the index is not a simple average of every shop price. ECB.

A clearly hypothetical example

Suppose a basket costs €100 today and its price rises by 2% over one year. It would then cost €102. If you still have €100, your account balance has not fallen, but it no longer buys the same basket. The 2% is an invented teaching assumption, not today's inflation rate or a forecast. This calculation illustrates the purchasing-power principle described by the ECB.

Two common questions

Does everyone experience the same inflation? Not necessarily. The official basket represents household spending overall. Your purchases may differ: someone spending more on items with faster price increases can feel a larger impact than the headline figure suggests. ECB.

Is a bigger balance always more purchasing power? No. The example shows why the number of euros and what those euros buy are different questions. To understand savings, distinguish changes in money from changes in prices rather than treating an unchanged balance as unchanged purchasing power. ECB.

Explore a hypothetical portfolio in the simulator and continue with how much to invest each month.

Sources

• European Central Bank — What is inflation?

This article is for educational purposes only and does not constitute financial advice.