What is inflation?
Inflation is the general and ongoing rise in prices. When it goes up, the same money buys you less than before.
How it is measured
Statistics offices track the price of a "basket" of everyday goods and services, such as food, electricity, rent or transport, and compare it with the same month a year earlier. In Spain this index is the CPI (IPC), published by the INE. If annual inflation is 3%, that basket costs 3% more than a year ago.
A simple example
Imagine your weekly shop costs €100. With 3% inflation, a year from now it will cost about €103. If your salary has not risen, you can buy a little less with the same money.
Why prices rise
- High demand: if people want to buy more than is produced, prices tend to rise.
- Higher costs: if energy or raw materials get more expensive, companies pass it on in their prices.
- Expectations: if everyone expects prices to rise, workers ask for raises and firms raise prices sooner.
The European Central Bank aims for inflation close to 2% over the medium term in the euro area, a level seen as helping the economy without eroding purchasing power too much.
How it affects you
- Idle money earning nothing loses purchasing power every year.
- If your income grows more slowly than prices, your standard of living falls.
- Fixed-rate debts weigh less over time, because wages usually rise.
What to keep in mind
When thinking about where to keep your savings, always look at the return after inflation. An account paying 2% while prices rise 3% means you are losing purchasing power in practice.
Inflation is how much prices rise in a year. If your income or savings do not keep up with it, your money is worth less.
Informational and educational content. Not financial advice.