Inflation never takes money out of your account. It does something harder to notice: it leaves the number exactly where it is and shrinks what the number buys.
The tax nobody invoices you for
Ten thousand under a mattress is still ten thousand in twenty years. At 3% average inflation, it buys roughly what 5,500 buys today. Nobody took anything. You lost 45% of it anyway.
That is what makes inflation so easy to ignore. Every other financial loss shows up as a smaller number somewhere. This one shows up as the same number and a worse life.
The rule of 70
Divide 70 by the inflation rate and you get roughly how many years it takes money to lose half its value. At 2%, thirty-five years. At 3.5%, twenty. At 7%, a decade.
It is the same arithmetic as the rule of 72 used for compound growth, pointed in the unpleasant direction — and it is worth memorising for exactly that reason.
Nominal versus real: the distinction that matters
A savings account paying 2% while inflation runs at 3% is not earning you 2%. It is losing you about 1% a year in purchasing power — reliably, quietly, while the balance climbs and feels like progress.
A rising balance is not the same as rising wealth.
This is the entire argument for investing money you will not need for a decade. Not greed, not optimism about markets — just the recognition that cash has a guaranteed negative real return whenever inflation runs above your interest rate, which is most of the time.
Your personal rate is not the headline rate
The published figure averages a basket of everything. Your basket is not that basket.
If most of your money goes on rent, childcare or healthcare — categories that have risen faster than average in many countries — your real rate is higher than the news says. If you own your home outright and mostly buy goods, it may be lower. The practical test: run your plan again at a point or two above the headline and see whether your conclusion survives. If it does not, the plan was more fragile than it looked.
Where inflation actually helps you
Fixed-rate debt. A mortgage payment agreed today stays the same in nominal terms while wages and prices rise around it, so it takes a shrinking share of your income every year.
This is one reason long-term fixed-rate borrowing behaves so differently from a variable-rate credit card, and why "inflation is bad" is too blunt a statement to plan with.
It does not feel like one, which is the problem. A 2% raise in a 3.5% inflation year means you can buy less than you could last year. Knowing the number before the conversation is the difference between accepting it and negotiating.
Four things to do about it
- Do not hold years of cash. Keep the emergency fund liquid and accept the slow leak — that is what instant access costs. Beyond that, cash is not safety, it is a decision.
- Get the best rate on the cash you do hold. The gap between a 0.1% account and a 4% one is not a rounding error over five years.
- Index long goals. A house deposit target set today will be wrong by the time you reach it. Build your inflation assumption into the number when you set it.
- Check your real return, not your nominal one. It is the only version that tells you whether you are moving forwards.