How inflation erodes your purchase power
Inflation is a unnoticed tax that we pay. And there is no way to escape it.
What is inflation
Every year that passes, things cost more. This is a fact. And also if we are often said that is due to wars, some external crisis or some other creative excuse, the real reason is that our economy is made to increase the prices of products every year that pass (the target of central banks is 2%, but actually the average of last 30 years is 2.23% in EU economic area). So even if there is for sure a better technical definition, inflation is the increase in quantity of a currency, that means the single unit of a currency will have less value and this results in an increase of prices.
Are you getting more poor
This depends if your annual incomes (that can include salary, investments, passive earnings) increase more than the inflation rate of the year.
Impact on lifestyle
To keep you at the same level you need to have an increase of your earnings of at least 2.23% every year. This is feasible if you work in a highly specialised job but it is not granted for everyone. This also subtly means that you need to make your income increase over the years, to mantain your current lifestyle. So if today you earn 2000€ per months, it will need to be 3108€ to have the same lifestyle of 20 years earlier.
Impact on investments
If you invest in a financial instrument that gives to you a return, you have to substract to it both the capital gain tax but also take into consideration this 2.23% inflation rate, that of course will impact the purchase power of your investment return. As an example lets take into consideration the average annual return of investment of the SP500 in the last 30 years, that is 9%. To this 9% you have to substract average inflation rate (2.23%) and then the capital gain tax (26%) and it will result in a more modest 5% considering the purchase power.
How to escape inflation
There is not easy way to escape inflation, because it impacts the purchase power of the currency that you must use to pay the taxes. Investment in scarse assets, such as Real Estate can help in deal with it and as you can see, house prices are skyrocketing not much because they are increasing in value but because the value of the underlying asset (Euro or Dollar) is going down. The only problem with real estate is the entry barrier, because it needs you to have a lot of capital to enter the market. Also the financial system requires you to have high end salaries to lend you money.
Bitcoin
Another alternative that is affirming in the market to contrast inflation is Bitcoin, that promises to democratise the economy, through the blockchain. The emission of Bitcoin is fixed at 21Milions and there is no way to inflate it as the emission of new Bitcoins is controlled by everyone who wants to contribute in the network (I will write a new articles based on Bitcoin in the near future, stay tuned)
Conclusion
We are always told that inflation is needed to maintain the economy, but this is actually a wrong statement. Inflation is needed to maintain the type of ecnomy we live within, that is based on debt.