Money and purchasing power are different
If your balance stays the same while goods and services become more expensive, it buys less. Inflation therefore changes purchasing power. It does not mean every product becomes more expensive at the same rate. Some prices may rise while others fall.
A basket as a measuring tool
Statistical price indices combine many goods and services, weighted to reflect typical spending. Households with different spending patterns experience different personal inflation. Someone spending a larger share on energy, for instance, may be more affected by energy price changes than the average household.
What falling inflation actually means
If annual inflation falls from 5% to 2%, average prices are still increasing, just more slowly. Previous price increases are not reversed. A sustained decline in the general price level is called deflation.
From nominal to real interest
A 4% nominal rate turns €1,000 into €1,040. With 3% inflation, a basket previously costing €1,000 now costs €1,030. The real gain is approximately 0.97%. The exact calculation is 1.04 / 1.03 − 1. Simply subtracting the rates gives only an approximation.
Long-term goals need more than a fixed number
For a goal several years away, the amount you need may change. As a pure illustration, €10,000 of today’s purchasing power would require about €12,190 after ten years with constant 2% annual inflation. This is not an inflation forecast; it demonstrates the mathematical relationship.
Putting the comparison to work
Compare interest and price changes over the same period. Include costs and taxes, and review your budget against actual spending. Inflation alone is not a reason to take unsuitable investment risks: liquidity, potential losses and your time horizon remain equally important.
Read more from official sources
Financial education for orientation. No individual investment, tax or legal advice.