Inflation

Inflation erodes the purchasing power of money. Discover how index funds protect you from it and calculate your real return with Index Balance.

Definition

Inflation is the generalised and sustained increase in the price level of goods and services in an economy over time. When there is inflation, each euro buys less than before. An inflation rate of 3% per year means that what costs €100 today will cost €103 in a year's time. The purchasing power of money erodes unless it grows at least at the rate of inflation.

For the investor, inflation is the silent enemy of savings. Money kept under the mattress or in a current account with no return loses real value every year. This is why investing in real assets such as equities — which have historically offered returns far above inflation — is the most effective strategy for preserving and growing purchasing power over the long term. Global equity index funds have delivered real returns (above inflation) of between 5% and 7% per year over the past 100 years.

Index Balance lets you compare your portfolio's nominal return against inflation for the period and calculate your real return. Try it free at indexbalance.com.

Practical example

You have €100,000 in a savings account at 1% per year. Inflation that year is 3%. In nominal terms you have gained €1,000. But in real terms you have lost purchasing power: your money now represents the equivalent of only €98,058 in buying power from a year ago. An MSCI World index fund returning 10% that same year would have given you a real return of +7%. Index Balance calculates this automatically every time you update your portfolio.