Inflation
Inflation is the gradual erosion of purchasing power --- the reason cash under the mattress is a losing strategy, and the invisible force that makes standing still equivalent to falling behind.
What is it?
Inflation is the sustained increase in the general price level of goods and services. When inflation is 2%, something that costs CHF 100 today will cost approximately CHF 102 next year. Your money has not changed. What it can buy has shrunk.1
Moderate inflation (1-3%) is normal and generally targeted by central banks as a sign of healthy economic activity. High inflation (>5%) erodes savings and destabilises planning. Deflation (falling prices) sounds good but is often worse --- it discourages spending and investment, creates debt spirals, and signals economic contraction.
For personal finance, the key insight: inflation is a tax on cash. Money sitting in a 0% savings account loses ~2% of its purchasing power annually. Over 20 years at 2% inflation, CHF 100,000 retains only ~CHF 67,000 of purchasing power. This is why investing --- accepting risk for return --- is not optional. Standing still is falling behind.
In plain terms
Inflation is the invisible thief. It does not take your money. It takes what your money can buy. CHF 100 in 2006 and CHF 100 in 2026 are the same number but not the same value.
How does it work?
Swiss context
Switzerland has historically low inflation compared to most countries (often below 1%). This is a structural advantage: your savings erode more slowly, your planning is more stable, and your real returns are higher for the same nominal return. But it is not zero --- and over decades, even 0.5-1% compounds.
Inflation and investing
All investment returns should be evaluated in real terms (after inflation). A “7% return” in a 2% inflation environment is a 5% real return. This real return is what actually builds purchasing power. The compound-interest concept is most powerful when applied to real returns --- nominal compounding that merely keeps pace with inflation is running to stand still.
Inflation winners and losers
Losers: Cash holders, fixed-income recipients (pensioners on fixed nominal pensions), lenders (repaid in less valuable currency).
Winners: Borrowers (repay loans in less valuable currency), asset owners (property and stocks tend to appreciate with or above inflation), wage earners (salaries usually adjust upward eventually).
This is why a mortgage at a fixed rate can be a good deal in an inflationary environment: you repay the loan in future currency that is worth less than the currency you borrowed.
Check your understanding
Five questions (click to expand)
- Calculate the purchasing power of CHF 50,000 after 25 years at 2% annual inflation.
- Explain why inflation makes investing a necessity, not a choice. What happens to cash over 20 years?
- Distinguish between nominal and real returns. Why should all investment decisions be evaluated in real terms?
- Connect inflation to Switzerland’s structural advantage. How does low inflation affect your savings and investment strategy?
- Argue why moderate inflation (1-3%) is targeted by central banks rather than 0%. What goes wrong with deflation?
Where this concept fits
Where this concept fits
graph TD MST[Money as Social Technology] --> INF[Inflation] PS[Price Signal] --> INF INF --> IR[Interest Rate] INF --> RR[Risk and Return] style INF fill:#4a9ede,color:#fff
Sources
Footnotes
-
Friedman, M. (1963). Inflation: Causes and Consequences. New York: Asia Publishing House. “Inflation is always and everywhere a monetary phenomenon.” ↩