Inflation rarely announces itself. It works quietly in the background and at some point you notice that the money sitting in your account buys less than it did a few years ago. That's not a coincidence, it's maths, and I think it's worth seeing that number in concrete terms at least once.
What Is Inflation?
Inflation describes the general rise in the price level. At 3% inflation, a basket of goods costing £100 today will cost £103 next year. Your money buys less than before – its real purchasing power falls.
Purchasing Power Formula
Example: £100,000 at 2.5% inflation after 20 years:
£100,000 × (0.975)²⁰ = £60,350 real purchasing power
Purchasing power loss at different inflation rates
£100,000 at 2% inflation: after 10yr = £82,035 | after 20yr = £67,297 | after 30yr = £55,207
£100,000 at 3% inflation: after 10yr = £74,409 | after 20yr = £55,368 | after 30yr = £41,199
£100,000 at 5% inflation: after 10yr = £61,391 | after 20yr = £37,689 | after 30yr = £23,138
What Protects Against Inflation?
- Equities and ETFs: Historically the best inflation hedge. Companies can pass on price increases. MSCI World returned 7–8% nominal long-term, i.e. 5–6% real.
- Property: Real assets tend to rise with inflation. Rental income and values adjust – but with regional variation.
- Gold: Classic inflation hedge, but no running income. UK capital gains tax exemption after holding.
- Index-linked gilts (linkers): Coupon and principal adjust with RPI – but low base yields.
- Cash ISA or easy access: Only protects if rate exceeds inflation. Currently marginal.
What Does NOT Protect Against Inflation
- Cash under the mattress: Guaranteed purchasing power loss
- Current account: 0% interest = full inflation loss
- Low-rate savings below inflation rate: Real loss despite nominal interest
Real Return: What Actually Matters
What counts is not the nominal return but the real return after inflation. An investment returning 4% at 3% inflation has only 1% real return. An ETF returning 7% at 2% inflation has 5% real return.
See Inflation's Impact on Your Savings
The free Return Calculator by Zinsora automatically shows both values for every calculation: the nominal final capital and the real inflation-adjusted value. See what your money will genuinely be worth.