Small rates add up
Prices rising 3% a year doesn't sound like much. But the rises compound: each year's 3% is added on top of the previous year's higher prices.
After 10 years at 3%, prices are 1.03 multiplied by itself 10 times higher: 1.03¹⁰ ≈ 1.344. Something that costs €1,000 today would cost about €1,344.
That is a rise of 34.4%, not the 10 × 3% = 30% you might expect, because each year's rise builds on the last.
What €1,000 buys after 10 years
Turn it round: €1,000 kept as cash for 10 years at 3% inflation buys what about €744 buys today. The sum is 1,000 ÷ 1.344 ≈ €744.
At 2% a year the loss is smaller but still real: 1.02¹⁰ ≈ 1.219, and 1,000 ÷ 1.219 ≈ €820 in today's money.
The 2% target
The European Central Bank's Governing Council aims for 2% inflation over the medium term to maintain price stability in the euro area. So even when things go to plan, prices are expected to keep rising slowly, and money left idle keeps losing some of what it can buy.
Countries outside the euro have their own central banks and their own inflation figures.
Why it matters for long goals
Inflation matters most over long periods. A goal that costs €10,000 today would cost about 10,000 × 1.344 = €13,440 in 10 years at 3% a year. When you plan a goal years away, raise the target over time or aim for savings that grow at least as fast as prices.
It works on debt too. A fixed loan payment stays the same while prices rise, so if your pay rises with prices, the payment takes a smaller share of it over time.
What you can do about it
Interest on savings offsets some or all of inflation. If your savings earn 2% while prices rise 3%, you are still losing about 1% of buying power a year: 1.02 ÷ 1.03 ≈ 0.990.
That doesn't mean all your savings should be invested. Money for emergencies and short goals needs to be there when you need it, so its job is safety, not beating inflation.
For money you won't need for many years, investing is one way to aim for growth above inflation, with the risk that values fall along the way. See investing basics and where to keep your savings.