Guide Personal finance
What inflation is, and why your money buys less every year
Inflation is the loss of purchasing power. Prices rise, the number in your account does not move, and the two drift apart. Here is where it comes from, why a falling rate does not undo it, and what you can do about it.
By NOUQUD Editorial Room3 min readUpdated
What inflation is
TermInflationالتضخّمA general rise in prices over time, so one riyal today buys less than it did a year ago.Open the term is the rate at which money loses purchasing power.
Start with a simple example. Think of the things you pay for every month: rent, bread, fuel, school fees, a phone bill. Say all of it costs you 10,000 today.
A year later the same list of things costs you 12,500. That is inflation of 25%. It is measured this way in every country that publishes a figure.
Your 10,000 has not changed. What it can buy has. Against that same list it is now worth 8,000.
Notice that the two percentages are different. Prices went up 25%, but what you can buy went down 20%. The easiest way to see why is to stop looking at percentages and count what you actually get.
The same 10,000, a year apart Plays on its own
Today the thing you buy costs 1,000. Your 10,000 buys ten of them, and that fills your budget exactly.
A year later the same thing costs 1,250. Each block is wider now, and ten of them no longer fit inside your 10,000.
Your money did not move, so the line did not move. You get eight of them now, not ten.
There are the two numbers. The price per item went up 25%. What you get went down 20%. That gap is what purchasing power means, and it is why the two percentages never match.
- TODAY
- 10 × 1,000 = 10,000.
- A YEAR LATER
- 8 × 1,250, and 2 no longer fit.
One year of that you can absorb. The damage is in what happens when it keeps happening.
What 10,000 buys, held still for ten years Plays on its own
Ten years with no inflation at all. Your 10,000 buys the same basket in year ten that it bought on day one. A flat line, and no country has one.
Now 25%. The basket that cost 10,000 costs 12,500, so your 10,000 buys 8,000 of it.
It happens again, and again. Each year multiplies what your money buys by 0.8: 6,400, then 5,120.
By year ten your 10,000 buys 1,074. Nine tenths of it is gone, and the number in the account never changed.
The same ten years at 10% leave 3,855. At 2% they leave 8,203. The rate is the difference between losing a fifth and losing nine tenths.
- AT 25%
- The 10,000 restated in the prices of each later year, with prices rising a quarter annually.
- AT 10%
- The same sum at a tenth a year.
- AT 2%
- The same sum at the rate a central bank would call normal.
The rate is not a detail of the story, it is the story. If you are saving at 2%, one year is not worth acting on. At 25%, one year costs you a fifth of what you had, and if the rate stays there you lose most of it.
That range is not hypothetical, and one country is enough to show it. Egypt’s annual urban inflation was 14.9% in July 2026. In September 2023 it was 38%.
Where it comes from
Inflation is caused by three things that push prices up, and one thing that keeps them there.
The three are separate and they do not overlap, and everything you read about inflation is describing one of them.
Three engines, and what keeps them running Plays on its own
Prices are rising. You can see that without being told. The useful question is what is pushing them.
Demand. More money chasing the same quantity of goods. Buyers bid against one another and sellers charge what they can get.
Cost. Fuel, freight, wages, a failed harvest. It costs more to make or move the thing, and the producer passes it on.
Currency. Your money buys less abroad, so everything brought in from outside costs more at home. In a country that buys its wheat and its fuel from abroad, this engine reaches the whole basket.
Then expectations amplify whichever engine is running. Which of the three it is decides what helps. A currency-driven rise does not answer to a household spending less.
- DEMAND
- MORE MONEY, SAME GOODS
- COST
- DEARER TO MAKE OR MOVE
- CURRENCY
- IMPORTS COST MORE AT HOME
- THE AMPLIFIER · EXPECTATIONS
- Then expectations amplify whichever engine is running. Which of the three it is decides what helps. A currency-driven rise does not answer to a household spending less.
Which of the three is running matters to you. If prices are rising because your currency has fallen, spending less at home will not slow them down. The cause sits outside your economy, and so does the fix.
Why a falling rate does not undo it
One thing to hold on to: a lower inflation rate does not mean prices are coming down. It means they are rising more slowly. The prices you were paying before are almost never seen again.
A headline says inflation has fallen from 25% to 5%, and most people hear that things are about to get cheaper. They are not. The distance that already opened up between prices and your money stays open.
The rate falls. The gap keeps opening. Plays on its own
Set today's prices at 100, and what your money buys at 100 too. They start in the same place.
One year at 25%. Prices go to 125. The same money now buys 80.
Inflation falls to 12%, half what it was. Prices still climb, to 140. Your money is down to 71.
It falls again, to 5%. Prices reach 147. Your money buys 68.
The rate fell by four fifths, and the two lines never stopped moving apart. Prices up 47%. What your money buys, down 32%.
- WHAT THINGS COST
- Where prices actually are, indexed to 100 today. A falling rate still moves this line upward, only more slowly.
- YOUR MONEY BUYS
- The same sum restated in each year's prices. It is the mirror of the line above it, and it is the one that decides what you can afford.
When the inflation rate decreases, prices do not.
Egypt is living this. Annual urban inflation fell to 14.9% by July 2026, well below its 2023 peak. Over the same years the urban price index went from 118 to 290. Prices are about two and a half times what they were, and the rate coming down did not move that.
So what would it actually take to get the old prices back?
What it would take to undo a 47% rise Plays on its own
Three years ago the same list of things cost 100. That is the level you remember.
Today it costs 147. The rise was 47%.
To get back to 100, that same 47 has to come off. Taken off 147, it is a fall of 32%, not 47% — because it is now measured against the bigger number.
A 32% fall in prices has a name: deflation. No central bank aims for it. So 147 is the level you plan against.
- THREE YEARS AGO
- 100.
- +47% · THE RISE
- +47.
That is why nobody plans on it. Falling prices arrive alongside falling wages and rising unemployment, so a TermCentral bankالبنك المركزيThe government's bank, which controls the money supply, sets interest rates, and oversees all other banks in the country.Open the term that meets TermDeflationالانكماشA general fall in prices over time, so one riyal today buys more than it did a year ago.Open the term treats it as an emergency rather than a win.
What to do
You cannot stop inflation, and you cannot wait it out. Three things follow directly from the five figures above, and none of them asks you to predict anything.
Do not hold more cash than you need to reach. Cash loses at the full rate of inflation, every year, and no statement records it. Keep what you would need at short notice and put the rest somewhere that pays.
Judge a savings rate against inflation, not against other savings rates. An account paying 4% loses money in a year when prices rise 10%. The comparison that decides it is with the basket, not with the account next door.
Do not wait for prices to come back down. They will not. Plan against the level where it now is.
Your money sits in four places, though: what comes in, what sits still, what you own and what you owe. Inflation does something different to each of them, and one of them is in your favour. That is the next guide in this dossier.
Common questions
What is inflation, in one sentence?
If prices rise 25%, why does my money only lose 20%?
If inflation falls, will prices come back down?
What actually causes inflation?
Sources
- Central Bank of Egypt — Monthly Inflation Developments and CPI Press Release, July 2026read
- Federal Reserve Bank of St. Louis — The Inflation Rate Is Falling, but Prices Are Notread
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