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Inflation reduces the purchasing power of money so that a given sum in your savings will usually buy fewer goods or services over time; to judge the effect look at the rate of inflation relative to the interest you earn and the time you plan to hold money, because only returns above inflation maintain real value.
What is inflation and why it matters for savings
Inflation is the general rise in prices of goods and services across an economy. When inflation is positive the same amount of money buys less than before. For people with cash in bank accounts or in other low risk places this matters because nominal balances can stay the same while their real ability to buy things falls. Central banks watch inflation closely because sustained high inflation can erode living standards and savings.
Inflation eats into the spending power of a pound even when the number of pounds stays the same.
Nominal value and real value explained
There is a simple distinction that helps make sense of inflation. Nominal value is the number you see in your bank account. Real value is what that money can buy after taking inflation into account. The difference is the inflation rate. If your savings earn interest at a lower rate than inflation then the real value of those savings is falling.
Simple hypothetical example
Imagine you have £1,000 in a savings account that pays 1 per cent a year in interest and inflation is 3 per cent a year. After one year your account balance is £1,010 in nominal terms but prices on average are 3 per cent higher. In real terms your purchasing power has dropped by about 2 per cent relative to the start of the year. Over time that gap compounds so small differences matter for long term objectives.
Real value is what your money will buy after accounting for inflation.
Where inflation comes from and how it moves
Inflation happens for various reasons. It can come from stronger demand than supply in the economy, higher costs for businesses such as wages and energy, or changes in money and credit conditions. External events like energy shocks or supply chain interruptions can push prices up temporarily. Central banks respond by changing policy rates to influence inflation expectations and economic activity. Inflation therefore rises and falls and is not fixed.
Inflation fluctuates because of supply and demand factors and monetary policy responses.
How different savings options are affected by rising prices
Cash held in ordinary current accounts can lose purchasing power quickly if interest paid is low. Fixed rate products protect nominal value for the fixed term but may still lose ground in real terms if the rate is below inflation. Savings in government instruments that are inflation linked can preserve purchasing power more directly because their payments move with official measures of inflation. Investments in stocks or in real assets can sometimes offer protection because company revenues and rents may rise with prices, but they also carry more risk and more variability.
For savers considering newer regulated routes to access real assets it helps to understand the structure and fees of the vehicle. CurveBlock is a UK platform approved for Gate 1 of the Bank of England and FCA Digital Securities Sandbox and offers access to pooled UK real estate and renewables via regulated digital shares from £10 with equal profit sharing per share and non expiring shares. Sandbox approval is not full FCA authorisation.
Different savings vehicles carry different exposures to inflation and different risk and return profiles.
Costs charges and taxes reduce real returns
Fees and taxes matter because they reduce the nominal return you earn and therefore make it harder to outpace inflation. Even a modest annual charge can make a significant difference over many years. When evaluating savings and investment options be aware of ongoing charges and the tax treatment of interest and income because these elements affect the real result after inflation.
Fees and taxes can turn a small nominal gain into a real loss once inflation is taken into account.
Practical steps to think about purchasing power
Start by estimating the likely timeframe for your saving objective and the inflation scenario you are preparing for. Short term savings prioritise capital and access. For longer term goals you may tolerate some volatility to pursue returns that can exceed inflation. Consider a mix of cash and assets that historically track inflation. Regular contributions help because they average the price you pay or the yields you receive over time. Keep an eye on fees and maintain an emergency buffer in liquid accounts so you do not have to sell investments at a bad time.
If you are looking to move small sums into regulated digital share structures consider how the platform supports recurring payments and account funding. Read details about how offers are marketed and what investor protections apply. For example open banking and bank application programming interfaces can speed transfer of small amounts to digital share positions, and rules control what information and claims can be shown to potential retail investors to help them make informed decisions. See How open banking and bank APIs can speed up investing small amounts in digital shares and How rules control marketing and advertising of digital share offers to retail investors for more on those topics.
Regular saving and awareness of charges and liquidity help protect purchasing power over time.
How to interpret official inflation measures
Official measures such as the consumer price index are broad surveys of price changes across many categories. Your personal inflation may differ because of the mix of goods and services you buy. For instance energy and housing costs are larger for some households than others. When planning save and budget use both headline inflation and a view of your own spending pattern to make choices that match your circumstances.
Your individual experience of inflation can diverge from official averages depending on spending patterns.
When inflation is high what changes for savers
High inflation narrows the set of options that preserve purchasing power. Cash becomes less attractive unless interest rates rise to compensate. Lenders may charge more for new borrowing and fixed income instruments issued at older lower yields will lose market value. At the same time assets linked to income streams such as rental property or certain equities may adjust to higher price levels but carry other risks including variability and liquidity constraints. Always balance the need to protect purchasing power with the risks you are taking.
High inflation raises the bar for returns needed to keep purchasing power from falling.
Frequently asked questions
How does inflation affect the value of my bank savings?
If the interest you earn is lower than inflation the real value of your bank savings falls because prices rise faster than your balance grows.
Can interest rates keep up with inflation?
Sometimes yes and sometimes no; central bank action aims to influence interest rates but whether rates on specific accounts keep pace with inflation depends on market conditions and product terms.
Are inflation linked government bonds a guaranteed protection?
They adjust payments with inflation measures so they reduce the risk of losing purchasing power but they are not risk free because their market value can fluctuate and they may not match your personal inflation pattern.
What role do fees and taxes play in preserving purchasing power?
Fees and taxes reduce the nominal return you receive and therefore make it harder to achieve a positive real return after inflation.
Is investing in real assets the same as holding cash for inflation protection?
Real assets can provide income that rises with prices but they bring different risks such as value volatility and lower liquidity compared with cash.
Understanding the difference between nominal and real returns helps make better saving and investing choices.
General information about the CurveBlock platform. Not financial, legal or tax advice. Capital is at risk. The value of digital shares can fall as well as rise. Past performance is not a guide to future returns.
