If the rate of inflation is higher than your interest rate on your savings account are you gaining buying power

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Kallie Lang

11 November, 17:37

If the rate of inflation is higher than your interest rate on your savings account are you gaining buying power

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Janelle Rojas · Answer 1

The parameter that determines your buying power is you money value. You money has a time value to it. To expound, your $5,000 will not be worth $5,000 after 10 years. It would have to increase because of inflation rate. In a nutshell, inflation is the increase of prices. This happens when an economy of a country is progressively increasing. More people are employed, they have higher salaries and more opportunities come their way. As a result, they get more comfortable in life and have the means to buy things. Because of increased demand, the price has to increase. Inflation rate is the increase of prices in the market.

Interest, on the other hand, is the increase of your money when you invest it in a bank or stocks. This is also related to inflation rate. However, interest is just the increase the bank has to offer for you.

Thus, in order to gain buying power, your interest rate should be higher than the inflation rate so that their would be no deficit. If inflation rate is higher, then that means that your $5,000 today is even worth less than $5,000 after 10 years.