What is inflation and how does it affect your savings

Inflation is the continued rise in the prices of the goods and services that we consume over a period of time. This price increase has a direct impact on the purchasing power of citizens and on the profitability of their savings. Let's take a look at how inflation is calculated and how it affects consumption.

How the CPI affects your grocery budget

In Spain inflation is measured by the Consumer Price Index (CPI). A rate that the Spanish National Statistics Institute (INE-Instituto Nacional de Estadística) publishes monthly and that measures the evolution of the level of prices of consumer goods and services acquired by Spanish households, taking into consideration the prices of 479 articles that make up a standard shopping basket.

Over the last decade (from September 2009 to September 2019), the CPI has varied by 12.9%, i.e. cumulative inflation has been 12.9%. Let's take an example to explain it better: a product that cost 100 euros in 2009, now costs 112.9 euros. In recent years inflation has been very low or even negative but this has not always been the case. In the early years of democracy in Spain, when the Peseta was Spanish currency, prices rose by over 10% per year (with peaks close to 30% per year and a cumulative 128% in the 1980s). Since the introduction of the euro in 2002, prices in Spain have risen by 39.6%.

The effects of inflation on your savings

Rising prices mean that our money loses value, and this means that we lose purchasing power (with the same amount of money we can buy fewer goods). But it also affects our savings. Let us take another example: in 2002 we put 1,000 euros into a piggy bank to save it for the future. Due to the effect of inflation, which, we must remember, was 39.6% until 2019, the 1,000 euros we had in 2002 have become 604 euros. This means we have lost money. Therefore, if we want to know if a saving or an investment is generating us wealth we have to subtract the negative effect of inflation, which will affect the final profitability.

So if you're thinking about getting the most out of your savings, look for a financial product that will give you a return greater than the existing inflation. Otherwise you will be losing money.

Now that you know what inflation is and how it affects your savings, it's important to keep it in mind when you invest. And also remember the three basic rules of investing: start as soon as possible, diversify and invest in the medium and long term. If you are thinking of investing your savings you can take a look at our ranges of investment funds or pension plans.