Prices do not stay the same forever. Inflation is why a sweet that cost 10 cents years ago might cost a euro today.
This article is the reading companion to the free Mondosol lesson Money Matters: Inflation, part of the Money course. Read it, watch the videos, or press play and listen first, then practise in the lesson.
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In this article
What inflation is
Inflation is when prices go up over time, so each unit of money buys less. When inflation is high, your money loses purchasing power: the amount of stuff it can actually buy.
The key words
| Word | What it means |
|---|---|
| Inflation | Prices going up over time, so money buys less |
| Purchasing power | How much your money can buy right now |
| Cost of living | The money needed for basics like food, rent and transport |
| Deflation | Prices going down over time, the opposite of inflation |
| Consumer price | The price ordinary people pay for everyday goods and services |
| Central bank | The bank that helps manage a country’s money supply and interest rates |
| Real value | What your money is worth after you account for inflation |
A simple example
Invented numbers, only to show the idea. Say a snack costs 1.00 euro today and prices rise by 5 percent a year.
| After | Price of the snack (EUR) |
|---|---|
| Today | 1.00 |
| 1 year | 1.05 |
| 2 years | 1.10 |
| 5 years | 1.28 |
If your pocket money stays the same, you can buy a little less each year. That is what falling purchasing power looks like.
Why prices rise
There is rarely one cause. Common ones include higher costs for making or moving goods, strong demand for limited supplies, and more money moving around in the economy.
Central banks try to keep inflation low and steady, often by changing interest rates. Real-world figures change often, so check an official source such as your central bank or statistics office for the latest numbers.
What it means for you
- Money kept in a drawer buys less over time if prices rise.
- Savings accounts may pay interest, which can offset some of the loss. Compare rates and read the terms.
- Wages can rise too. What matters is whether your income keeps up with prices.
- A budget helps. Review it when your regular costs change.
To see how money can grow, read Compound Interest Explained.
Watch: inflation
Two videos explain what inflation is, one from a central bank and one from the EU statistics office. They are explanations, not advice.
Video: “What is inflation?” by Bank of England, on YouTube.
Video: “Inflation explained to kids” by Eurostat, on YouTube.
Take it further
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Frequently asked questions
What is inflation in simple words?
It is when prices rise over time, so the same amount of money buys less than before.
What is purchasing power?
How much your money can buy. When inflation rises, purchasing power falls.
Is inflation always bad?
Slow, steady inflation is normal in many economies. Fast inflation is harder for people on fixed incomes or savings.
What is deflation?
Deflation is when prices fall over time, the opposite of inflation.
How can I protect my savings from inflation?
There is no single answer. Compare savings rates, keep an eye on your costs and learn the basics of investing. This is education, not advice.
Keep learning
- Course: Money
- Lesson (practise it): Money Matters: Inflation
- Read next: Investing Basics and Compound Interest Explained
- Related: How to Set a Savings Goal
Educational, not financial advice. The example numbers are invented, and this post contains no affiliate links. Mondosol is not a licensed financial adviser.
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