What is inflation and how does it affect my savings?

Inflation is the rate at which prices rise, which means each unit of money buys less over time. Your savings don't shrink numerically — their *purchasing power* shrinks, which is the loss you can't see in your account balance. **The arithmetic**: if inflation is 6% and your savings account pays 3%, your real return is roughly −3%. You have more money and can buy less with it. At 6% inflation, prices roughly double in twelve years — so ₹1 lakh kept in cash for twelve years buys what ₹50,000 buys today. **Why this matters most for long-term money**: over one year, the effect is barely noticeable. Over twenty or thirty years — the horizon for retirement savings — it's the dominant force. This is the core reason 'keeping it safe in the bank' is not actually safe for long-term goals: it's a slow, certain loss rather than an occasional, visible one. **What tends to keep pace with or beat inflation:** - **Equities** have historically delivered real returns above inflation over long periods — with substantial volatility along the way. - **Property**, broadly, though with high costs and local variation. - **Inflation-linked bonds**, where available, which adjust their payout with the index. **What loses to inflation reliably**: cash under a mattress, current accounts, and low-interest savings accounts. Long-dated fixed-rate bonds also suffer when inflation rises unexpectedly. **The practical implication for how you hold money:** - **Short-term money** (emergency fund, anything needed within two or three years) should stay in cash or near-cash despite inflation. Losing a few percent of purchasing power is a fair price for certainty when you might need it next month. - **Long-term money** should be invested, because over decades inflation is the larger risk than volatility. **Two things that catch people out:** 1. **Your personal inflation rate differs from the headline number.** The published index is an average basket. If your spending is concentrated in categories rising faster than average — rent, education, healthcare — you're experiencing higher inflation than the reported figure. 2. **Salary increases that match inflation are not raises.** A 5% increase during 6% inflation is a real-terms pay cut. Worth keeping in mind during negotiations, where the relevant comparison is the inflation rate, not zero.