Inflation is the general and lasting rise in prices. It is discreet: your bank balance stays the same, but it buys a little less each year. It is the most underestimated risk for savers, precisely because it does not show on an account statement.
How inflation eats away at savings
If prices rise by 3% a year, you need 3% more income just to buy the same things. Capital placed in an instrument that earns less than inflation gets poorer in real terms, even if its displayed amount goes up. What matters is not the figure on the screen, but what you will be able to buy with it. The effect is cumulative, like compound interest but in reverse. Moderate inflation that looks harmless over one year becomes considerable over 20 or 30 years, the horizon of a retirement or a property project.
Worked illustration (fictional)
You save €10,000 in an instrument that earns 2% a year, while inflation is 3%. After one year, you have €10,200. But what used to cost €10,000 now costs about €10,300. Your real return is about −1%: you can buy less than before. Over 20 years, this gap removes nearly 18% of your purchasing power. These figures are illustrative and vary from one period to another.
Which assets protect, and which do not
No asset protects against inflation every time, but some families hold up better over the long run. Shares of companies able to pass rising costs on to their prices have historically preserved purchasing power over the long term. Rental property and certain bonds whose interest follows inflation follow the same logic. Conversely, cash and fixed-rate bonds are the most exposed. That does not mean you should put everything in shares. A cash safety reserve remains essential for unexpected expenses: erosion is the price of peace of mind, and it is reasonable to pay it on that portion only.
- Cash: safe in nominal terms, but exposed to monetary erosion.
- Fixed-rate bonds: the coupon does not adjust, and the value falls when inflation and rates rise.
- Shares: potential long-term protection, at the price of high volatility.
- Real assets (property, commodities): partial hedge, with their own risks.
Two risks to weigh
Market risk (seeing your capital fluctuate) and erosion risk (seeing its value melt away silently) are two sides of the same trade-off. Choosing to avoid only the first often means suffering the second.
Key takeaway
- ✓The return that matters is the real return, after inflation.
- ✓Idle capital loses purchasing power slowly and cumulatively.
- ✓Keep cash for unexpected expenses, and think about how much of your savings is exposed to erosion over the long term.