Inflation is the generic term used to describe a rise in prices. Rising inflation is often seen as bad news for households and businesses. With higher energy and raw material costs, it is a chain reaction that directly affects purchasing power.

Inflation is a complex economic process that is in the spotlight. Let's take a look at this phenomenon to better understand it, and why saving is an excellent way to reduce the effects of inflation on your budget! 

How does inflation work and how to keep investing despite it?

Definition of inflation: a rise in prices for consumers    
How does inflation affect my savings plans?    
How can I continue to save and invest when my purchasing power is decreasing?    
Inflation rates: where do we stand?    
What are the causes of inflation in 2022?

DEFINITION OF INFLATION: HIGHER PRICES FOR CONSUMERS

Inflation is a loss of purchasing power of money. Mechanically, one euro buys fewer things: when inflation rises, money loses its value.

In economics, and more broadly in any discussion you may have on this subject, the term 'inflation' is synonymous with an increase in prices across the market. It applies to both goods and services. 

Inflation is measured using the consumer price index. The analysis of inflation and the figures reported by institutions focus on the final prices of household consumption. 

how does inflation impact my savings ?

Inflation is an important factor to consider when deciding to invest. 

Assuming that the annual rate of inflation is 3%, this means that the money set aside in that year would have lost 3% of its value. For the same income, inflation means that a household would be less and less wealthy.

This is why interest rates on savings accounts or bank loans vary according to inflation. This does not mean that it is not worth investing when inflation is rising! 

Even if interest rates sometimes seem too low compared to inflation, saving at least allows you to lose less money on the amount invested. Having trouble understanding? Let's put it into perspective! 

The interest rate on a savings account compensates for inflation in part or in full.

If you invest €10 in a savings account with an interest rate of 3%, and on the other side of the coin there is 3% inflation, then you have not lost any money on the €10 invested. 

10 not invested during 3% inflation = You get €9.7.
10 invested in a savings account at 3% = You get €10.3.
10 invested in a 3% savings account during 3% inflation = You get €10.
10 invested every month with Birdee = €3,128.61 after 15 years.

Conversely, notes kept under your pillow lose value. They are still worth €10, but you can buy fewer things with them. So even though you have money in your hand, you are less wealthy. 

Investing wisely is therefore always useful, especially in a context of rising prices. Without investment, you are entirely subject to inflation, whereas the gains from investment at least partly compensate for the loss of purchasing power of money. 

HOW CAN we keep saving and INVESTing WHEN OUR PURCHASING POWER IS DECREASING? 

With less purchasing power, households give priority to vital expenses (heating, shopping, rent, electricity, etc.). In this context, it is sometimes difficult to put money aside, and especially to think about medium or long-term investments. When the value of the currency is falling and prices are rising, every euro spent is considered. However, this does not mean that you should stop all investments.

Indeed, investing in securities accounts or savings accounts with banks is a way to partly compensate for inflation and the loss in value of money.

Here are some tips and information to know to continue to invest despite a drop in purchasing power in your household: 

Inflation rates

Annual inflation rates for the Euro area in October 2022 :

These numbers take into account the harmonised consumer price index. The annual inflation rate shows the change in prices of consumer goods and services between the reference month and the same month of the previous year.

what are the causes of inflation in 2022 ?

At the end of 2022, the main contributors to inflation are energy, food, alcohol and tobacco, services and industrial goods (excluding energy). The geopolitical situation in 2022 has greatly contributed to this situation. 

As energy is one of the expenditure items that is difficult to do without, an increase in the price of electricity, gas or fuel immediately weighs on the balance of household budgets. This is all the more visible as the investments that could be made to reduce energy bills (renovation work) are difficult to access for people with financial difficulties. Although there is support for the energy transition, it still represents a significant sum.