How does inflation impact savings and investments?

Inflation significantly affects the purchasing power of money over time, which is why the correct answer highlights that it erodes purchasing power, thereby reducing the future value of savings. When inflation rises, the cost of goods and services increases, meaning that each dollar saved will buy fewer items in the future than it would today. This decrease in purchasing power means that even if nominal values in savings accounts appear to be increasing, their real value—once adjusted for inflation—may actually be declining.

If someone saves money but does not earn an interest rate that at least matches the rate of inflation, the real value of their savings diminishes over time. Therefore, individuals need to consider inflation when planning their savings and investments to ensure they maintain or grow their purchasing power. This understanding is crucial for making informed financial decisions regarding long-term savings strategies and investment choices.