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The impact of inflation

What is inflation and how does it affect your money? 

Inflation is the general increase in the prices of goods and services over time. When general prices go up, your money buys fewer goods and services. This means inflation reduces the purchasing power of money.

If your savings are growing more slowly than inflation, your money will lose spending power even though your account balance is increasing. Understanding how inflation works can help you decide whether saving, investing or a combination of both is right for your goals.

What is inflation?

Inflation is the increase in the price of goods and services over time.

In simple terms:

  • Prices go up
  • Your money buys less
  • The same item costs more than before

Example

If your trolley of shopping cost you €100 today and €105 next year, you will need more money to buy the same things. This is called losing “purchasing power”.

How does inflation affect your savings?

If your savings do not grow as quickly as prices rise, your money loses purchasing power. Over time, this can reduce the real value of your savings, meaning they may not go as far when paying for goods and services in the future.

Example

If you have €10,000 in a savings account earning 2% interest, you'll have €10,200 after a year. But if inflation is 4%, you'll need €10,400 to buy the same goods and services. Although your savings have increased, your money can buy less than before.

Can investing help your money keep pace with inflation?

Historically, investments have offered greater potential to outpace inflation over the long term than savings products (such as savings accounts or fixed-term deposits). However, unlike savings accounts, investment returns are not guaranteed, and the value of investments can fall as well as rise.

Before investing, it is important to have money set aside for short-term needs and unexpected expenses. Once you have built up savings for these purposes, you may decide to invest money that you do not need to access in the short-term.

Whether saving, investing or a combination of both, is right for you, will depend on when you'll need your money, how comfortable you are with risk and the level of certainty you need.

You should consider saving if you:

  • Need to build up savings for unexpected expenses
  • Plan to use your money in the near future, for example, as a deposit for a house 
  • Would be significantly impacted if the value of your money fell

You should consider investing if you:

  • Have already built up savings for emergencies and short-term needs
  • Can leave your money invested for several years
  • Are comfortable accepting some risk in exchange for potentially higher returns

Learn more about the difference between saving and investing.

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