Inflation

Inflation is not one item getting dearer. It is the general price level rising, measured by a consumer price index that tracks a fixed basket of goods and services.

At 2% a year, SAR 100 today has the purchasing power of about SAR 98 in a year's time. Same balance, less capacity.

Because it makes holding cash a decision rather than a neutral default. A current account paying nothing loses purchasing power every year at very nearly the rate of inflation, a little less once the loss is divided rather than subtracted.

It is also why a pay rise can leave you worse off. A salary is agreed once and then sits still; prices do not. A 5% rise in a year when prices went up 8% is a pay cut that nobody has to announce, and it arrives without a conversation or a letter.

The part most people underestimate is that it compounds. Two years at 10% is not 20% — it is 21%, and five years of it leaves prices half again as high as they started. That is why a period of high inflation is not undone by a period of low inflation: the level stays where the high years left it, and "inflation is falling" means prices are still rising, only more slowly.

• Always compare a nominal return to the real one: nominal minus inflation.
• Inflation reduces the real burden of fixed-rate debt and penalizes anyone holding cash.
• The official rate is a national average. Your own spending may look nothing like the basket.