What is inflation?
Inflation is a sustained trend of increasing prices that reduces the real value of your money over time. As the inflation rate increases, the purchasing power of your money decreases, and you may not be able to buy as much with it as you used to. It also indicates how much of a return investors need to maintain their standard of living.
How does it impact your money?
Inflation erodes the purchasing power of your money. For example, if you can buy groceries for €100 this year, and the yearly inflation rate is 10%. Theoretically, those same groceries will cost 10% more next year or €110. If your income doesn’t increase at least by the same inflation rate, your shopping basket will be a lot smaller.
How to beat inflation
Inflation erodes the real value of money on deposit when the inflation rate exceeds the deposit interest earned. By leaving your money in cash, you could lose a considerable portion of its value over time (as seen in the table below).
On the other hand, investing can help generate higher inflation-beating returns over the long term, making it a better potential solution to meet long-term investment goals.
Why equities more suited to long-term investing
Long term performance of cash vs equities 20 years to 01 February 20244
Warning: Past performance is not a reliable guide to future performance.
Source: Aviva Investors and Aviva Life & Pensions Ireland DAC. Cash is 20-year annualised cash rate (1 month Euribor). Inflation is average eurozone inflation over last 20 years. Equities is the 20-year annual return of the MSCI World NR Eur.
Learn more
Now 96% of money on deposit in Ireland earns an interest rate of under 1%1 and the inflation rate is just over 3%2. If you want to give your money the potential outperform inflation, talk to your financial broker about investments with inflation beating potential over the long-term, such as multi-asset or equity funds.