Inflation, and what it does to money sitting still

Inflation is prices rising. Turned around, it is money buying less than it used to, which is the version that matters to anybody holding some.

Now1 yr2 yrs3 yrs4 yrs5 yrs

At 3% a year, money sitting still buys a little less every year.

Money in a drawer is not safe from it. The figure stays exactly the same and quietly does less. At 3 percent a year, $1,000 left alone still reads $1,000 after ten years and buys roughly what $740 buys today.

This is why the interest an account pays is only half a sentence. An account paying 2 percent while prices rise 4 percent is losing about 2 percent a year in what the money can do, even as the balance goes up.

It is also why one published figure lands differently on different households. An average is built from a basket of many things, and a household whose money goes mostly on one of the fast-rising things feels more than the average, whatever the headline says.

The balance goes up. What it buys goes down. Both are true at once.

It works the other way on a fixed debt. A fixed repayment is the same figure every month while wages and prices move, so its weight falls over time. That is one of the few places inflation quietly helps.

None of this argues for holding less cash. Money needed soon still belongs somewhere steady, and a small loss of buying power is a fair price for being able to reach it on the day.

It is a reason to notice, though, when a large amount has sat untouched for years with nothing asked of it.