Inflation & Purchasing Power

Inflation reduces the purchasing power of money. At 3% annual inflation, €1 today is worth about €0.74 in 10 years and €0.55 in 20 years. Cash savings held in low-yield accounts lose real value every year. The key insight: the nominal number in your bank account stays the same, but what it buys shrinks continuously.

The most severe hyperinflations occurred in Weimar Germany (1923, where prices doubled every few days), Zimbabwe (2008, 89.7 sextillion percent), and Hungary (1946, the highest recorded inflation rate). More recently, the 1970s saw sustained high inflation across Western economies (10–15% in the US and UK), driven by oil shocks and expansionary monetary policy.

Inflation affects real (inflation-adjusted) returns critically. A 7% nominal stock return with 3% inflation gives a 4% real return. Bonds suffer particularly in high-inflation environments because their fixed coupons lose purchasing power. This is why "real returns" matter more than nominal ones for long-term wealth building.

Cash held in a bank account earning 0-1% interest loses value when inflation runs at 2-3%+. A €100,000 account at 0.5% interest with 2.5% inflation loses about €2,000 in real purchasing power every year — silently. This is why keeping excessive cash is often described as "guaranteed slow loss" rather than "safe".