What is inflation?

Inflation is the rate of increase in the level of prices for goods and services, which affects the purchasing value of money.

In the UK the most well-known and detailed measure of inflation is the Retail Prices Index. The rate of inflation is expressed as a percentage and is published every month. The National Statistics Office define it as 'an average measure of change in the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK'.*

Why is inflation such a problem?

Inflation is a bit like rust. At first you hardly notice it, then gradually it builds up and starts to corrode your savings. Although inflation isn't as high as it was in the 1970s and 1980s,* it still has the power to erode the value of an investment. So any money you invest has to grow by at least the rate of inflation just to stop its purchasing power from falling. You should also consider the charges on any investment you make, which can also eat into the value of your investment.

Could you give me a simple example?

Let's imagine inflation at 4%. It doesn't seem like much, but it means that in 10 years the purchasing power of £1000 will fall to only £676 in today's

Source : AXA