Inflation is the rate at which prices rise over time. When inflation is 5%, something that cost €100 last year costs €105 this year. That is all it is — but the effects ripple through every part of your financial life.
Why does inflation happen?
There are several causes, and they often interact. When more money is in circulation than there are goods and services to buy (demand-pull inflation), prices rise. When the cost of producing goods increases — energy, materials, labour — companies pass those costs on (cost-push inflation). Supply chain disruptions, like those during the 2020-22 pandemic, can trigger sudden sharp inflation.
How it affects you directly
Your savings lose value. Money sitting in a standard current account at 0% interest loses purchasing power every year there is inflation. €10,000 with 5% inflation is worth €9,500 in real terms after one year.
Your salary may not keep up. If your pay rise is 2% and inflation is 5%, you have effectively had a pay cut of 3%.
Your debt becomes cheaper. The flip side of inflation: if you have a fixed-rate mortgage, the real value of what you owe falls as inflation rises. This benefits debtors and harms creditors.
What you can do
Move savings into higher-yield accounts, government bonds, or broadly diversified investments that historically outpace inflation. Look into inflation-linked savings products. Negotiate salaries with reference to inflation, not just company performance. And reduce exposure to cash over long time horizons.
