Inflation and your savings: understanding real returns
Inflation quietly reduces what your money can buy. Real returns measure whether your savings are keeping pace.
By Rainsbridge
1 min read
For information only. This is not financial advice or a personal recommendation.
Inflation is the rate at which prices rise over time. When prices rise, each pound buys a little less, which matters for anything you are saving for.
Nominal and real returns
The nominal return is the headline figure: the interest rate on your savings account, for example. The real return is what is left after inflation. As a rough guide:
Real return ≈ nominal return − inflation
If your savings earn 4% while inflation is 3%, your real return is about 1%. If inflation were 5%, your money would be losing about 1% of its buying power each year.
Why it matters over time
Small differences compound. Over ten or twenty years, a gap of a percentage point or two between your returns and inflation can make a large difference to what your savings can buy.
Where to find the figures
The Office for National Statistics publishes UK inflation figures each month on its inflation and price indices pages.
