The Relation Between Interest And Inflation

In my country, the government often increases the public service salary every year. This year, the government lifts the salary 5%. Do you think this news make the public service happy? Some of the office may be happy with the announcement. In reality, the inflation rate is 6 % or higher than the salary.

The officer who knows this information must be sad. It is not a “Increasing salary” but a ” adjusting salary”. The government does not lift the salary but they just adjust the salary to inflation. The adjustment is not fit too. The increasing salary is 5%; while, the inflation rate is 6%.

Inflation is a problem in economic so it maybe a problem for you too. Your money value will decrease. Today, you can buy an apple for a dollar. Next year, the apple price is one dollar five pence. You could not buy a hundred apples with a hundred dollars like today.

If you put the money in bank that offers 2%, you will get $102. With $102, you still cannot buy a hundred apples. Therefore, the bank does not give you any interest to your money.

Therefore, you should consider the inflation before asking put your money at any investment. Some scientist suggests calculating the real interest is the nominal real interest relative to inflation rate. 

High interest does not guarantee you to get much money. For example: A bank may offer 9% interest a year certified deposit but the inflation is 8.5%. You should not take this cd because it loses your money. Find other investment that gives you higher return. The real of interest rate is = 9% – 8.5% = 0.5%.

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