Inflation: how rising prices shrink the value of money

Inflation is the rate at which prices in general rise — which is the same thing, seen from the other side, as the rate at which each unit of money buys less. The two move together because they are one fact described twice. At just 2% a year, €100 of shopping today costs €121.90 in ten years and €199.99 in thirty-five. That last figure is the point most people miss: a rate small enough to feel harmless roughly doubles prices over a working lifetime, because inflation compounds — each year’s rise is charged on top of every rise before it.

The two faces of the same number

When you read that inflation is 2%, you can hear it two ways, both correct. Prices are climbing 2% a year, so the same basket costs more. Or: money is losing 2% of its purchasing power, so each euro buys slightly less. Rising prices and falling money are not two effects but one measurement — which face you look at depends on the question you are asking.

Why small rates matter over long stretches

A single year of 2% barely registers; stretch it out and it stops being small. That €100 basket becomes €121.90 after ten years, €148.59 after twenty, and €199.99 after thirty-five — 2% roughly doubles prices in thirty-five years. Push the rate up and the curve steepens fast: at 5%, €100 reaches €162.89 in ten years; at 10%, €259.37. The same force runs in reverse for money you expect later. €10,000 arriving in thirty years buys about €5,520.71 of today’s goods at 2% inflation; €26,533 in twenty years buys roughly €17,856.

What you can do from here

From here you can project what a price will cost years from now, discount a future sum back to today’s money, and find the real rate — what a return is worth once inflation is stripped out. A 5% return with 2% inflation is a real 2.94%; a 10% return with 8% inflation is only 1.85% (subtracting would say 2%); and a 2% return with 5% inflation is a real −2.86%, so the money loses ground even as the balance grows.

Why economists set the target at 2%

What causes inflation is contested economics. Economists generally group the drivers into three — demand pressures, cost pressures, and expectations — and no single cause explains every episode. Central banks generally aim for around 2% inflation rather than zero, and the European Central Bank’s published explainer sets out the reasons commonly given: a small buffer keeps the economy clear of deflation, where falling prices can stall spending, and it leaves room for prices and wages to adjust without turning negative.

Around does not report live inflation figures yet. The numbers here are worked examples — use the calculators to run your own.