MarketsBeginner· 7 min read

Inflation: the tax nobody votes for

The one thing to remember

Cash is not risk free. It carries the certainty of losing purchasing power.

Inflation is the quiet transfer of wealth away from anyone holding cash. It requires no decision, no announcement, and no consent. Doing nothing with your money is not the cautious option: it is a choice with a slow, compounding, entirely predictable cost.

What it does

If prices rise 3% a year, the £100 in your account buys 3% less next year. Your balance did not change. Your purchasing power did. Repeat that for twenty-three years and half of it is gone.

What cash is worth laterInteractive

Inflation3%

Years25

£100 becomes

£48

Purchasing power lost

52%

Half gone after

23 yrs

At 3% a year, money loses roughly half its purchasing power in 23 years. Sitting in cash is a decision, and it has a cost.

Nominal versus real

Real return

Your return after inflation. A savings account paying 2% while inflation runs at 4% gives you a nominal return of +2% and a real return of roughly −2%. The number in your account grows while your actual wealth shrinks. This is why "I did not lose any money" can be false even when the balance went up.

Real return ≈ nominal return − inflation

The approximation is fine for small numbers; it understates the damage at high inflation.

What actually defends against it

Businesses with pricing power. A company that can raise prices with inflation passes the problem on to its customers. This is the deepest link between inflation and moats: pricing power is inflation protection.
Real assets. Property, infrastructure, commodities. Their prices tend to move with the general price level, though not reliably in the short term.
Index-linked bonds. Explicitly adjusted for inflation. Modest returns, but they do what they promise.

What does not defend against it

Cash, and conventional long-dated bonds. Both promise you a fixed number of pounds, and inflation is the process of making each of those pounds worth less. They are the assets inflation is designed to eat.

The safest-feeling asset carries the one risk that is guaranteed to happen.

Inflation: the tax nobody votes for

What it does

Nominal versus real

What actually defends against it

Read next