Learn the stock market › Saving for the long term › Lesson 5 of 5
Inflation and your savings
The real return
The real return is how much your money grows measured in what it can buy. It is calculated like this:
Real return = (1 + return) / (1 + inflation) − 1.
A simple approximation is the return minus inflation. What inflation is and how it is measured is in What is inflation?.
A worked example with the official figures
In the twelve months to September 2026, the consumer price index rose 3.7%. A savings account paying 2% then gave (1.02 / (1 + inflation)) − 1 = −1.7% in real terms. When the rate is below inflation the real return is negative, even though the balance grows.
Over longer periods it adds up. Consumer prices rose 37.0% from December 2015 to December 2025. Someone holding $10,000 then needed $13,701 at the end to buy as much.
The Federal Reserve aims for prices to rise 2% a year. Even at that pace money buys half as much after 35 years. It is compounding working the wrong way, as in the lesson on compound interest.
The stock market after inflation
From December 1928 to December 2025 the S&P 500 grew 6.0% a year, without dividends. Prices rose 3.1% a year. After inflation that is 2.8% a year.
The table starts from every December and shows how often the index beat inflation.
| Holding period | Beat inflation | Median, per year after inflation | Worst, per year after inflation |
|---|---|---|---|
| 1 year | 57 of 97 | +7.3% | −41.6% |
| 5 years | 62 of 93 | +4.7% | −14.5% |
| 10 years | 64 of 88 | +4.0% | −7.0% |
| 20 years | 62 of 78 | +3.6% | −4.0% |
| 30 years | 68 of 68 | +3.7% | +0.4% |
In a single year the index beat inflation in 57 of 97 cases. Over twenty years in 62 of 78, and the worst twenty-year period began in 1928.
Every thirty-year period beat inflation, the worst at +0.4% a year.
Dividends come on top and have been a large part of the real return. How much is in the study of the stock market's average return. How stocks did in years of high inflation is in How does inflation affect stocks?.
Test yourself
Your savings grow 4% in a year and inflation is 5%. What happened to what your money can buy?
How we calculated
- The consumer price index for all urban consumers, December to December, and the twelve months to September 2026.
- The S&P 500, its last close in December. Dividends, fees and taxes are not included.
- The savings account's 2% is an example, not a rate any bank has paid.
Sources
- U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (CPI-U), US city average, not seasonally adjusted, read Nov 5, 2026.
- Federal Reserve, Monetary Policy: What Are Its Goals? How Does It Work?, read Nov 5, 2026.