Inflation

Inflation means that over time the same amount of money buys less. If inflation runs at 3% per year, something that costs 100 today will cost 103 next year. For investors, this means that simply holding cash is a losing strategy—your savings lose purchasing power every year.

This is one of the most compelling reasons to invest. To preserve and grow real wealth, your investments need to earn a return that exceeds inflation. Historically, equities have delivered returns well above inflation over long periods, while cash and short-term bonds have sometimes barely kept pace.

Central banks such as the European Central Bank or the US Federal Reserve have a mandate to keep inflation low and stable—typically targeting around 2% per year. When inflation runs significantly above target, central banks raise interest rates, which tends to dampen economic activity and reduce asset prices in the short term.