inflation
The general rise in prices over time, which lowers what a fixed amount of money can buy.
Inflation is the general rise in prices over time. When it runs at 5% a year, the same basket of goods costs 5% more after a year, so a fixed amount of money buys less. It is usually measured with a consumer price index that tracks what a typical household pays.
Inflation matters most for money that sits still. Cash in a drawer or a low-rate account can look safe because its balance never falls, yet its buying power shrinks every year. Over decades even a modest rate takes away a large share of what the money can buy.
One job of long-term investing is to grow faster than prices. That is why returns are best judged in real terms. Inflation also changes: long calm stretches can be followed by a sudden spike, and in those years both cash and bonds can lose buying power.
Example
A Zapas beta user keeps a 100,000 UAH cushion in cash. At 10% inflation for 5 years it is worth 100,000 / 1.10^5 = 62,092 UAH in today's money, 37.9% less; at 6% it would be worth 74,726 UAH.
In Zapas's synthetic 40-year market, $1,000 left in a drawer is worth only $286 in today's money at the end (−71.4%). In a high-inflation stretch (years 35–37), cash earning interest grows 15.2% in money terms but still loses 10% of its buying power. The numbers are illustrative.
Common mistakes
- Thinking cash is risk-free over decades because its balance never falls.
- Reading growth in money terms as growth in buying power.
- Assuming inflation will stay as low as it has been recently.
Learn it in the course
- Saving, investing, speculating and the real return · How saving, investing and speculating differ, and how to turn a nominal return into a real one after inflation and devaluation.
- Bonds: yield, rate risk and the year both fell · What a bond is, why its price moves with interest rates, short vs long bonds, and a year when stocks and bonds fell together.
- Volatility and a typical bad year · Standard deviation of yearly returns, what a typical bad year and the worst year look like for stocks and short bonds.
- Drawdown, recovery and time under water · Maximum drawdown, the gain needed to get back to the peak and how many months a portfolio can stay below it.
- A range, not a number: twenty-five years of possible paths · Where long-run returns come from, and how to read twenty-five years of simulated paths as a range with a median, a 10th and a 90th percentile.