Usually, an increase in the inflation rate of 2 percent is considered beneficial for the economy. However, this year, the inflation rate rose far above this benchmark. As recently as October 2022, an inflation rate of 10.4 percent was announced. The high inflation rate means that your assets lose value. Therefore, in this article, we want to show you precisely what inflation is, how it affects your saved money, and give tips on protecting your money from inflation.

What exactly is inflation?

Inflation is understood as an ongoing loss of purchasing power of money, which is accompanied by an increase in the prices of goods and services. This means that in the future, you will be able to afford less with the same amount of money as you can today. Therefore, inflation is influenced by increasing money supply and demand and a lack of supply. 

The Federal Statistical Office calculates inflation every month using Germany’s consumer price index (CPI). This measures the average price trend based on a representative basket of over 600 goods and services that private households buy for consumption, from food to clothing to housing costs. The inflation rate describes the change in the consumer price index compared with the same month of the previous year.

How inflation affects your savings

High inflation is especially devastating for those who leave their money in checking, savings, or overnight deposit accounts: This money simply loses more value over time. If, for example, owners of call money or savings accounts have to put up with average inflation of 4 percent over five years and do not receive any interest as compensation, they will lose 17.8 percent of their assets in real terms over this period. For a sum of €10,000, this means that the money in the account or savings book will only be worth €8,219 after five years.

How to protect your money from inflation

There are several ways to protect your money from inflation. Here are a few examples:

1. Buy gold

You can protect your money from inflation by investing in precious metals like gold. This is because precious metals have been exceptionally well shielded from inflation, as they cannot be multiplied infinitely. However, there is also a disadvantage to investing your assets in gold: You don’t receive distributions as you do with stocks or bonds in the form of dividends or interest. The reinvestment of the current amounts is, therefore, not possible. Therefore, the compound interest effect, which is the strongest driver – or the eighth wonder of the world – of investment, is also lost.

2. Buy real estate

Another alternative is the purchase of real estate to protect your assets against inflation. Real estate prices often rise in parallel with inflation, as rental contracts are often linked to the inflation rate. This way, real estate investments retain their value. Nevertheless, there are also two disadvantages: First, a considerable amount of equity is needed to buy a property. Second, the European Central Bank has raised the key interest rate several times in recent months, making loans more expensive.

3. 🔥Our tip: Investing in ETFs

Fortunately, you don’t need considerable equity when you invest money. At UnitPlus, you can start investing from as little as 1€. Plus, you can decide how much risk you want to take – we will help you with our globally diversified portfolios. This way, you can actively protect your money against high inflation.