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Inflation

Level 1 · Basics
German termInflation
Read firstPercentages and shares · Purchasing power
Used byNominal vs. real · Discount rate · Real yield / real return

Inflation is the rate at which the general price level rises, eroding the purchasing power of money over time. A euro today buys less than the same euro a year from now whenever inflation is positive. Germany's Statistisches Bundesamt (Destatis, federal statistics office) measures it monthly through the Verbraucherpreisindex (VPI, consumer price index — the German CPI).

Why it matters​

Inflation acts like a silent tax on cash: money sitting in a non-interest checking account loses purchasing power every year prices rise, even though the number on the balance stays the same. This is the root of the gap between nominal value (the euro figure printed on a statement) and real value (what that figure actually buys), a distinction covered separately under nominal vs. real. Destatis tracks the VPI monthly by pricing a fixed basket of goods and services and comparing it to the same month a year earlier. Germany's annual average inflation rate for 2025 was 2.2% (Destatis, January 2026) [1].

Worked examples​

1. What 2% annual inflation does to €10,000 in cash over 10 years. At a hypothetical, illustrative 2% rate, purchasing power shrinks by a factor of 1.02^10 each decade. €10,000 held as cash (earning no interest) buys the equivalent of about €8,203 in today's terms after 10 years — a loss of roughly €1,797, or about 18% of what the money could originally buy. The number on the account statement still reads €10,000; only its purchasing power has fallen. This is the mechanism that makes cash a poor long-term store of value once inflation is factored in, and it is why the nominal-vs-real distinction matters for any savings goal measured in years rather than months.

2. How a price index converts to a rate. Suppose Destatis's VPI basket cost 120.0 index points in one July and 122.4 index points the following July. The inflation rate for that 12-month period is (122.4 − 120.0) / 120.0 = 2.0%. The VPI itself carries no unit; it is only the year-over-year percentage change in the index that gives the inflation rate reported each month.

Check yourself​

You hold €10,000 in cash (earning no interest) for 10 years, and inflation runs at a steady 2% per year. In today's purchasing-power terms, how much is that €10,000 actually worth after 10 years? (Round to the nearest euro.)

Destatis's VPI basket cost 200.0 index points last July and 206.0 index points this July. What annual inflation rate, in percent, does this represent?

Prices rise 2% in year 1 and 2% again in year 2. After year 2, how much higher are prices compared with the start of year 1?

Germany's reported monthly inflation rate slowed from 2.3% (November 2025) to 1.8% (December 2025). What does this actually mean for prices in December?

Sources​

  1. Statistisches Bundesamt (Destatis) — Inflationsrate im Jahr 2025 bei +2,2 %, https://www.destatis.de/DE/Presse/Pressemitteilungen/2026/01/PD26_019_611.html (2026)