Inflation and real returns: how much purchasing power grows
Does my wealth grow when prices rise at the same time?
More euros in an account do not automatically buy more goods and services. To assess purchasing power, investment and price changes must cover the same period. Past inflation and an assumption about future inflation are different kinds of information.
Separate nominal and real values
The nominal final value is the amount of money at the end. The real final value expresses its equivalent purchasing power at the start. The Bundesbank distinguishes backward-looking calculated real interest rates from expected real rates. A future model result is therefore not a real return that has already been observed.
Why simple subtraction is only approximate
With a 3% nominal annual return and 2% price inflation, the exact annual real return is (1.03 / 1.02) − 1 = about 0.9804%. The one-percentage-point difference is an approximation. Division compares growth factors: the larger euro amount is divided by the simultaneously higher price level. A net assessment requires the return to have already been adjusted for relevant fees and tax.
Ten years affect both sides
Illustrative assumptions: €10,000 grows by 3% annually for ten years without withdrawals, tax or fees. The nominal final amount is €13,439.16. With simultaneous constant inflation of 2% a year, this equals €11,024.80 in today’s purchasing power. The nominal increase of €3,439.16 is therefore different from the purchasing-power increase of €1,024.80.
A particular expense may rise differently
A general price index describes a basket of goods and services. The future cost of a particular home, education or purchase can develop differently. For a specific savings goal, use a reasoned assumption about that expense. General inflation is a benchmark, not a price forecast for every individual purchase.
Plan with several price assumptions
Calculate the target and investment with lower, middle and higher price increases. Use the same time basis and do not mix real targets with nominal final values. Regular contributions also need their actual payment dates: a euro added shortly before the target date has not been invested for ten years.
Purchasing-power decisions depend on the real final amount after comparable costs. The exact calculation uses growth factors; assumed inflation remains a scenario, not knowledge of the future.