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Inflation as a Silent Thief of Purchasing Power: How Investments Slow It Down
Key takeaways
- Inflation erodes the purchasing power of cash and low-yield savings every year.
- Real return is nominal return minus inflation — that is the number that matters.
- Equities and real estate have historically beaten inflation over the long term.
- Money in a savings account earning less than inflation loses real value.
- The CNB targets inflation around 2% per year — historically it has deviated significantly from this target.
Inflation is a sustained rise in the price level that reduces the purchasing power of money — the same amount buys fewer goods and services than before, and cash or low-yield deposits thus lose real value every year.
How Inflation Damages Savings
At 3% annual inflation, 100,000 CZK in a savings account with zero return loses approximately 26,000 CZK in real purchasing power over 10 years. Even a savings account paying 2% does not fully solve the problem — the real return is negative. This is an unavoidable effect — inflation acts automatically, without any decision on your part.
Nominal vs. Real Return
Investors should always monitor the real return — nominal return minus inflation. If a fund returned 7% and inflation was 4%, the real return is a mere 3%. That figure is precisely what measures the actual increase in purchasing power. Historically, global equity indices have provided a real return of approximately 5–7% per year; bonds less; savings accounts in an inflationary environment close to zero or negative.
The Role of the CNB and the Inflation Target
The Czech National Bank targets inflation at 2% per year (±1 percentage point). In reality it has repeatedly deviated from this target — Czech inflation in the period 2021–2023 reached double-digit levels, significantly damaging the real value of savings held in cash and low-yield products. This episode served as a reminder that inflation risk is not merely theoretical.
- Cash and savings accounts: yield usually does not cover inflation in turbulent periods
- Government bonds: moderate protection, depends on the real interest rate
- Equities: historically the best long-term protection, with volatility in the short term
- Real estate: solid protection, but low liquidity
How to Protect Yourself
Protection against inflation requires an asset whose nominal return repeatedly exceeds inflation. A global equity ETF has historically met this condition — corporate profits grow with prices, so equity returns carry a natural inflation shield. The key is compound interest over time, which turns a small annual real return into a large cumulative effect.
FAQ
What is inflation in simple terms?
A sustained rise in the price level that reduces the purchasing power of money. At 3% inflation, 100 CZK buys approximately what 74 CZK buys today in ten years' time. Cash without a return loses value automatically.
What is real return?
The nominal return on an investment minus inflation. A fund with a 7% return in an environment of 4% inflation delivers a real return of 3%. That is the true increase in purchasing power — the only number that really matters for the investor.
Does a savings account protect against inflation?
It depends on the interest rate. If the yield on the savings account is lower than inflation, the real value of savings falls. During periods of higher inflation (as in the Czech Republic in 2021–2023), savings accounts did not preserve real value.
Why are equities a good hedge against inflation?
Companies can generally raise prices for their products and services in line with inflation, so their profits — and thus the value of their shares — grow in nominal terms. Over the long term, equity returns have historically outpaced inflation.