What is the impact of inflation on savings?

Inflation decreases the purchasing power of saved money because as the general price level rises, each unit of currency buys fewer goods and services than before. If the rate of inflation surpasses the interest rate earned on savings, the real value, or purchasing power, of the amount saved diminishes over time. For example, if you save $1,000 at a 1% interest rate while inflation rises at 3%, your money will be worth less in terms of what it can actually purchase in the future. This means that despite having the same nominal amount saved, the actual value of those savings in the economy decreases, leading to a loss of value.

This perspective highlights the importance of considering inflation when saving or investing, as it emphasizes the need for savings strategies that at least keep pace with inflation to preserve purchasing power.