What is the real rate of return?

It is the rate of return after inflation - the only one that tells you how much your purchasing power has really grown. It is calculated with the Fisher equation: real = (1 + nominal) / (1 + inflation) - 1. It is not enough to subtract inflation from the interest rate: with an 8% return and 6% inflation you really earn 1.89%, not 2%.

What will PLN 100,000 be worth in 20 years?

With inflation at 5% a year, PLN 100,000 hidden under the mattress will have the purchasing power of PLN 37,689 today in 20 years. It will buy roughly what PLN 37.7k buys today. That is a loss of value of over 62%.

Does a savings deposit protect against inflation?

Usually not fully. The bank deducts 19% Belka tax from the interest, so a 5% gross deposit gives 4.05% net. If inflation is 5%, you really lose about 0.9% a year - even though your statement shows nothing but gains. A deposit protects your capital in nominal terms, not in real terms.

Why is holding cash a guaranteed loss?

Cash earns 0%, and inflation works on it like compound interest in reverse. With inflation at 4.5%, cash loses about 4.3% of its purchasing power a year, and after 20 years more than half its value. It is the only asset class where a real loss is certain, not just likely.

Inflation and real rate of return calculator - what you really earn

Q: What protects against inflation?

Assets whose value rises together with prices: inflation-indexed bonds (in Poland the COI and EDO series), broad-market equities over the long term, and property. None of them is risk-free. Paradoxically, a fixed-rate loan also protects you - inflation reduces the real value of your debt.

Explanation

Inflation is compound interest in reverse

In the compound interest calculator we show how interest added to the capital starts earning on its own. Inflation does exactly the same with prices - except that you are sitting on the other side of the table.

If prices rise by 5% a year, in the second year that 5% is already charged on the increased prices. A loaf of bread costing PLN 5 costs PLN 5.25 after a year, PLN 5.51 after two, and after twenty - PLN 13.27. Your PLN 100 in your wallet hasn't changed by a single zloty. What has changed is how much it buys you.

purchasing power = amount ÷ (1 + inflation)^years

It is the same formula as for compound interest, only with division instead of multiplication.
The exponent is just as relentless - only downwards.

What is really left: the purchasing power of PLN 100,000

The amount in your account doesn't change. What changes is what it buys. Below: PLN 100,000 stuffed in a sock, at different levels of inflation.

Inflation	After 5 years	After 10 years	After 20 years	Loss after 20 years

PLN 100,000 after 20 years at 5% inflation = PLN 37,689

This is not a mistake or scaremongering - it is arithmetic. Over 62% of the value disappears, while your statement shows an unmoved "PLN 100,000.00" the whole time. Inflation is the only tax that nobody votes for and nobody sees on a transfer.

The Fisher equation - and the subtraction trap

The real rate of return tells you how much your purchasing power has really grown. Intuition tells you to simply subtract inflation from the interest rate. Intuition is wrong.

real = (1 + nominal) / (1 + inflation) - 1

NOTE - subtracting is not enough.
With an 8% return and 6% inflation you really earn 1.89%, not 2%.
You receive interest in money that is already worth less - and that is the difference simple subtraction misses.

At low rates the error is small. At high rates it becomes painful: when inflation reaches 15% and a deposit pays 18%, subtraction promises 3% - you really get 2.61%. The higher the numbers, the bigger the gap between what seems to be and what is.

The Belka tax trap

The bank advertises a deposit at 5%. You won't get 5%. The tax office takes 19% of the interest, so what reaches you is 4.05%. And it is that number - not the one in the advert - that goes into battle with inflation.

Gross deposit rate	After Belka tax (net)	With 5% inflation	Verdict

The break-even point is higher than you think

To break even with 5% inflation, a deposit must pay about 6.2% gross - because only after deducting 19% tax are you left with 5%. Anything below that threshold is a real loss, however appealing it looks on your statement.

The general rule: the gross interest rate must exceed inflation by roughly a quarter of its value just to preserve the value of your money.

Why holding cash is a guaranteed loss

With shares you can lose. With bonds you can lose. With cash you lose for certain - the only question is how much.

Cash and a non-interest-bearing current account return exactly 0%. Inflation doesn't ask for permission. There is no risk to weigh up here, because there is no uncertainty - there is only a falling curve, the same one you can see in red on the chart above.

That doesn't mean cash is useless. A financial cushion covering 3-6 months of expenses must be instantly available, and that is worth its price - you pay with inflation for peace of mind and liquidity. But everything above that cushion lying idle in an account is simply dissolving slowly.

What protects against inflation?

Inflation-indexed bonds (COI, EDO). The Polish State Treasury pays inflation plus a margin in the following years. It is the simplest instrument that by definition doesn't lose to inflation - although after Belka tax the margin can shrink almost to zero.
Broad-market equities, over the long term. Companies raise prices along with inflation, so their revenues grow with it. Historically, equities have beaten inflation most reliably - but with high volatility and no guarantee in the short term.
Property. Rents and prices usually follow inflation. High entry and transaction costs, poor liquidity.
A fixed-rate loan. It sounds paradoxical, but inflation reduces the real value of your debt. The instalment stays the same while your salary and prices rise - so every year that instalment hurts less. A fixed-rate borrower is one of the few people whom inflation really helps.

Three things to remember

1. Only the real rate counts - after tax and after inflation. The rest is the illusion of a bank statement.
2. Don't subtract inflation from the interest rate. Use the Fisher equation, because subtraction always overstates the result.
3. Cash above your financial cushion is the only investment with a guaranteed loss.

Now that you know how inflation eats away at capital - see how the same mechanism works in your favour in the compound interest calculator. It is literally the same curve, only turned the other way.