You have 55,000 in your savings account that pays 2.5% annual interest and the inflation rate is 3.4%. How much buying power will you lose in one year because of inflation?
We solve the question as follows: Simple interest=Principle×Rate×Time Thus given: p=$55000, R=2.5%, time= 1 year thus Interest=55000×0.025×1=$1375
To evaluate the amount required to keep up with the inflation, your interest rate should match the inflation rate otherwise prices are going up faster than the savings. Required interest rate=55000×0.034×1=$1870
The buying power lost will be the difference between your required interest and actual interest.
