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Interest and inflation are similar.
If it is compounded annually, then you multiply the value by 1.04 each year.
So...
If you start with $100.
At the end of the first year you have $104.
At the end of the second year, you have $104*1.04 = $108.16
At the end of the third year, you have $108.16*1.04 = $112.49
At the end of the fourth year, you have $112.49*1.04 = $116.99
At the end of the fifth year, you have $116.99*1.04 = $121.67
That means, after 5 years, on average, an item that had cost $100 the first year would now cost $121.67.
In general this is just averages, and nothing goes up at exactly the same rate.
If you had saved the $100 in a non interest bearing cash, or your wages had not increased over time, then your original $100 now has "buying power" equivalent to $100*(100/$121.67) = $82.19.
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rose by 1 percent
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rose by 1 percent
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When you are earning interest is it better to have high or low rates?
High rates.However, high interest rates are usually a consequence of high inflation rates and so what matters is not the interest rate but the real interest rate which is the nominal interest rate relative to the inflation rate.Thus a 3% interest rate when inflation is 1% is better that a 5% interest rate when inflation is 4%.
