If the inflation rate is 5% and a savings account earns 3% interest, what is the real interest rate?
Answer (1)
If your savings account earns 3% interest and the inflation rate is 5%, your real interest rate is actually –2%. This means that although your money is increasing in numbers, its purchasing power is shrinking.Let’s say you saved ₱1,000 in a bank account. At 3% interest, you will have ₱1,030 after one year. But because prices have gone up by 5%, something that cost ₱1,000 last year now costs ₱1,050. So even though you earned ₱30, you actually lost ₱20 in buying power.In short, your savings can buy less than before. This is why high inflation is bad for people who keep their money in savings or fixed-income accounts. In the Philippines, this often affects retirees and minimum-wage workers the most because they rely on fixed income and can’t adjust their earnings quickly.To protect your money, some people invest in assets like real estate, mutual funds, or government bonds that offer higher returns than inflation. But not everyone can access these, which is why managing inflation is one of the key roles of economic planners.This example shows that it’s not just how much money you earn in interest that matters—but also how fast prices are rising around you.
