How inflation affects fixed-term deposits

Encarni Arcoya

5 minutes

Hyperinflation occurs when monthly inflation exceeds 50%

Whether it's inflation or fixed-term deposits, you've probably come across terms that you don't quite understand and you don't know if you could be losing money and making bad decisions. One of the most common questions when talking about inflation and fixed-term deposits is how inflation affects fixed-term deposits. Is it a good thing or a bad thing?

If you would like to know if inflation is positive or negative for fixed-term deposits Then take a look at the information we have compiled for you.

What is inflation

It is difficult to stop or control a hyperinflation

Before we talk about the consequences of inflation for long-term deposits, it is important that you fully understand what we are referring to when we say inflation. According to the RAE, inflation is an increase in the general level of prices. In other words, it is a rise, increase, rise or increase in prices in general.

The fact that prices rise implies that the value of money decreases because less can be bought with the same amount of money that was available before and with which more things could be bought.

In every country, inflation depends on several factors such as:

  • Demand exceeds supply. In other words, what happens is that more products or services are requested than are actually offered on the market. A clear example could be what happened with masks during the pandemic due to the high demand that there was, prices rose significantly.
  • Increase in the production costs of a good or serviceWhen creating a product costs more than usual, it is normal for the selling price to also rise to compensate for the increased cost of the material used.
  • Self-constructed inflationIt occurs as a precaution, causing the prices of goods or services to rise gradually with less impact on consumers' pockets.
  • Inflation of the monetary base. This involves a greater production of the amount of money in circulation to generate an increase in demand and in turn increase prices due to the shortage of being able to supply all the products that are requested.

What are fixed-term deposits?

There are different types of bank deposits

On the other hand, we have fixed-term deposits. This is a financial product that gives you a fixed and guaranteed returnTo do this, what you have to do is keep a certain amount of money deposited in the bank for a period of time and, during that time, you cannot move it or withdraw it.

The maximum amount you can invest without any risk is 100.000 euros per account holder and institution. This amount is due to the fact that it is insured by the Deposit Guarantee Fund.

Among the Most important features to keep in mind when taking out a fixed-term deposit

  • Profitability, which would be the interest rate that the bank gives you for having the money for a certain period of time.
  • Term, which is the duration of the deposit and usually ranges between three and 36 months.
  • Amount, which is the amount of money that you are going to deposit in that account and that you will not move for a certain period of time.
  • Settlement, which is the moment in which you will be paid the interest generated by that money deposit.
  • Cancellation, which is the possibility of recovering the money you have deposited before the fixed-term deposit expires. Of course, you have to take into account that there will be a penalty on the interest.

Why inflation affects fixed-term deposits

for the nominal salary and real salary to be equated, the increase must be equal to that of inflation

Now that you know more about what inflation is and what fixed-term deposits are, you may already have an idea of ​​why it affects you. A fixed-term deposit has an interest rate and conditions that do not change over time. This means that if inflation is higher or lower, it will not affect you, but, in reality, you would be losing money.

To give you an idea, Any inflation is going to erode the purchasing power of the money you have deposited in that bank account. For example, imagine you have 10.000 euros in a fixed deposit with an annual interest rate of 0%. The annual inflation is 5%. That means you are losing money because you only get 2%. And you lose 0,5%.

For this reason, experts always recommend looking for fixed-term deposits with the highest interest rates, or even not using this financial product at all, but rather one with a variable interest rate.

Is it now clear to you how inflation affects fixed-term deposits?