Imagine you have:
$10,000
A year later it becomes:
$10,400
You earned 4%.
Good news.
But there’s another question:
What happened to prices?
Suppose prices also increased around 3%.
Your account contains more dollars.
But those dollars also buy less than before.
That’s the difference between:
Nominal return
and
Real return.
A simple approximation
If your investment grows:
4%
and inflation is:
3%
your approximate real return is around:
1%
The exact calculation is slightly different, but this simple subtraction is useful for understanding the concept.
The Bank of Canada describes inflation as a persistent increase in the average price of goods and services. When prices rise, purchasing power falls: the same money buys less.
Canada’s current monetary-policy framework targets 2% inflation, the midpoint of a 1%–3% range.
Why this matters over decades
Inflation doesn’t look dramatic in one year.
That’s exactly why people underestimate it.
At a hypothetical 2% annual inflation rate, something costing $100 today would cost roughly:
$122 in 10 years
$149 in 20 years
$181 in 30 years
That doesn’t mean every product rises exactly 2% every year. Inflation varies, and individual prices behave differently.
The point is that long-term financial planning should consider purchasing power, not just the number of dollars.
Nirvair takeaway
Don’t only ask:
“Did my money grow?”
Ask:
“Did my purchasing power grow?”
That single question changes how you think about cash, investing and retirement.
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