Breakdown
How it works
Inflation compounds just like interest. At 3% a year prices double in about 24 years, so a fixed income or cash savings halve in real terms. Any return below inflation is a real loss even if the balance grows.
Formula
Future cost = amount × (1 + inflation)^years
Purchasing power = amount ÷ (1 + inflation)^years
Worked example
1,000 today at 3% inflation costs 1,344 in 10 years; equivalently 1,000 in 10 years buys what 744 buys today.
Frequently asked questions
What inflation rate should I use?
2% is the UK, US and eurozone target; UK CPI averaged about 3% over 20 years; GCC inflation runs 1–3%. For specific costs (school fees, healthcare) use 5%+.
How does inflation affect savings?
Real return = (1 + nominal) ÷ (1 + inflation) − 1. Cash at 4% with 3% inflation earns about 1% real.
Does the UAE or Saudi Arabia have high inflation?
Historically low — the dollar peg imports US monetary policy. Rents are the volatile component, especially in Dubai.