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Part 2 · Inflation: the value of money · Lesson 7

Inflation: the same money buys less

Rising prices mean the power of money is getting weaker. The same KRW 10,000 gets a little smaller every year.

Reading time: 14 minLesson 7 of 43Data as of: Korea CPI Sep 2026 · policy rate Aug 2026 · checked 2026-10-05✓ Read

QToday's question

Are KRW 10,000 ten years ago and KRW 10,000 today really the same KRW 10,000?

The KRW 10,000 bill in your wallet still says KRW 10,000 after ten years. But what you can buy with it keeps shrinking. In this lesson, we build up step by step how the 'number' on money differs from the 'power' of money, and what that difference means for deposits and stocks.

MAPLearning map for this lesson

We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.

Before you start

In Part 1, you learned that the economy moves in cycles (Lesson 5) and that leading indicators tell you about that flow in advance (Lesson 6). When the economy heats up, inflation is one of the first things to run hot. The 'discount rate' you got a taste of in Lesson 1 and the nominal vs. real distinction from Lesson 4 are used again here.

  1. STEP 1 · Basic conceptsInflation and the power of money

    You will be able to explain that means 'the of money shrinks,' and tell apart the three causes of rising prices.

  2. STEP 2 · Understanding the mechanicsMoney that shrinks by compounding, and the real interest rate

    You will be able to calculate purchasing power directly from the inflation rate and the period, and explain the difference between the nominal rate and the .

  3. STEP 3 · Real-world applicationChecking with Korean and US inflation

    You will be able to read how the value of your money changes using real inflation data, and connect how inflation shakes the two knobs of stock prices.

Knowledge built33 concepts built so far · 4 added in this lesson

Part 1 · Getting familiar with economics 29 ✓
Stock priceMarket capitalizationEPS (earnings per share)P/E (price-earnings ratio)Discount rate previewEarnings knob and multiple knob4 economic agentsCircular flow of moneySpending = incomeExport shareSupply and demandEquilibrium pricePrice cycleCyclical sectorsGDPValue addedNominal and real GDPEconomic growth rateGDP components (consumption, investment, government, net exports)QoQ and annualizedBusiness cycleRecovery, expansion, slowdown, recessionPeak and troughCyclical component of coincident indexCyclical and defensive stocksLeading, coincident and lagging indicatorsPMI (50 threshold)Diffusion indexComposite leading indicator (100 baseline)

Part 2 · Prices

InflationNEWPurchasing powerNEWRule of 72NEWNominal vs. real ratesNEW

STEP 1Inflation and the power of money

Start by flipping the phrase 'prices are rising' around. Goods getting more expensive is the same story as money getting less valuable.

An easy analogy · The shrinking gimbap roll

With KRW 10,000 you could buy 5 rolls of gimbap at KRW 2,000 each. A few years later, when gimbap costs KRW 2,500, the same KRW 10,000 buys only 4 rolls. The bill still says '10,000,' but the gimbap it can exchange for is one roll fewer.

The power of a single banknote to be exchanged for goods is called purchasing power. When prices rise, purchasing power shrinks. Goods becoming more expensive and money becoming weaker are the same event seen from two sides.

The gimbap prices are examples to aid understanding.

Inflation is a 'general and sustained' rise

is the phenomenon of prices in general continuing to rise, not just one item. If only apple prices jump because of the weather, that is a price move in apples, not inflation. When restaurant meals, transportation, rent and tutoring fees all rise together, and not once but year after year, we call it inflation.

That is why inflation is measured as an 'average' rather than as a single price. Korea's main inflation indicator, the , is a weighted average of the prices of 458 goods and services that households buy often, weighted by spending share. How much this index rose versus a year earlier is the 'inflation rate' we hear in the news. You will learn how to read CPI in detail in Lesson 8.

Source for item count: Statistics Korea (the national data agency), explanation of the consumer price inflation indicator (e-Nara Indicators). Checked 2026-10-05.

Why do prices rise?

The reasons prices rise fall into three broad groups. In reality, several causes often overlap.

1. Because many people want to buy

When the economy improves and income and spending grow, the number of people who want to buy goods grows faster than the speed at which goods are made, and prices rise. This cause connects to supply and demand in Lesson 3 and the expansion phase in Lesson 5.

2. Because the cost of making things rises

When crude oil and raw material prices or the exchange rate rise, companies' costs increase, and companies pass that burden on to prices. In 2022, Korean oil product prices rose 22.2%, pushing inflation up sharply.

3. Because too much money has been released

When the money supply () grows faster than goods, each unit of money loses value. 2021–2022, when inflation rose after ultra-low rates and large-scale support payments, is an example.

Source for the 2022 oil product increase: Statistics Korea, '2022 Annual Consumer Price Trends' (released 2022.12.30, reported by Hankyoreh).

Quick checkBecause of the rainy season, vegetable prices alone rose 30% in a month. Can you say 'inflation has arrived' from this alone?
Not yet. Inflation is prices 'in general' rising 'continuously.' One item like vegetables rising briefly because of the weather is an individual price move. You need to check together whether it spreads to other items and lasts for months. That is why we separately look at 'core inflation,' which excludes weather-sensitive items (Lesson 8).

STEP 2Money that shrinks by compounding, and the real interest rate

In STEP 1, you learned that purchasing power shrinks as prices rise. Now let's calculate in numbers 'how much' it shrinks.

Purchasing power shrinks by compounding

Prices rise again on top of last year's higher prices. So the of money shrinks not by the same amount each year but by the same percentage, like compounding.

Calculating the future value of KRW 10,000

Purchasing power = amount ÷ (1 + inflation rate)yearsA calculation that assumes prices rise at the same pace every year
  1. After 1 yearKRW 10,000 ÷ 1.03 = about KRW 9,709 worth
  2. After 2 yearsKRW 10,000 ÷ 1.03² = about KRW 9,426 worth
  3. After 10 yearsKRW 10,000 ÷ 1.03¹⁰ = about KRW 7,441 worth

If prices rise 3% every year, KRW 10,000 in 10 years is worth only KRW 7,441 in today's money. More than a quarter has vanished. The hallmark of compounding is that the amount lost each year is not the same KRW 300; instead, 3% is lost again from a shrinking amount. The same principle as the Compound Interest Calculator, which grows your money, works in the opposite direction.

See it in a chart: how small will my KRW 10,000 get?

Change the inflation rate and the period. On the left is today's KRW 10,000, and on the right is the power that money will have in the future.

TodayKRW 10,000
10 yrs later: purchasing powerKRW 8,203

KRW 10,000 ÷ (1.02)10 = KRW 8,203 worth · shrinks by about 18%

Try pressing the '2% · 35 yrs' button. Even if prices rise steadily at just the 2% annual target, purchasing power drops to almost exactly half in 35 years. That means money saved when you start your career has lost about half its power by the time you retire.

Rule of 72: 72 ÷ inflation rate ≈ years until purchasing power halvesAbout 36 years at 2%, about 24 years at 3%, about 12 years at 6%

The is a trick for doing compounding math quickly in your head. It was originally used to estimate 'how long it takes money to double,' but applied to inflation it becomes the time it takes for the power of money to be cut in half. It differs slightly from the exact value, but it is good enough to get a feel for it.

Nominal vs. real interest rates

If a bank deposit pays 3% a year, the number in your account grows 3% after one year. This is the nominal interest rate. But if prices rose 5% over the same period, what you can buy with the larger sum actually shrinks. The true return after subtracting inflation is called the .

Real interest rate ≈ nominal interest rate − inflation rateIt is the same principle as 'nominal GDP vs. real GDP' in Lesson 4
  1. DepositPut KRW 10 million in at 3% a year and you get KRW 10.3 million after 1 year
  2. PricesA basket of goods that cost KRW 10 million a year ago rose 5% to KRW 10.5 million
  3. Result10.30 ÷ 10.50 ≈ 0.981 → actual purchasing power down about 1.9%

The number in your account grew by KRW 300,000, yet what you can buy actually shrank. Calculated exactly it is −1.9%, and by the rough formula 3% − 5% = −2%, which is almost the same. When the real interest rate is negative, people who simply sit on cash lose out, and borrowers see the real burden of what they must repay shrink.

That is why, when inflation rises too fast, central banks raise the policy rate to push the real interest rate back into positive territory. Both the Bank of Korea and the US Fed set their at 2% a year. The Bank of Korea has targeted 2% CPI inflation (year over year) since 2019, while the Fed targets 2% on the PCE price index. Why the Fed looks at PCE instead of CPI is covered in Lesson 9.

Common misconceptions

'If the inflation rate falls, do prices get cheaper?'
No. When the inflation rate falls from 5% to 2%, it only means prices are 'rising less quickly,' and prices are still going up. Prices continuing to fall is deflation, which causes a different set of problems (Lesson 10).
'Deposits guarantee your principal, so they are the safest?'
The number is protected, but its power is not. In years when interest is lower than inflation, even a deposit is effectively a loss. A safe asset and an asset whose 'purchasing power is guaranteed' are different things.
'Is 2% inflation basically no increase?'
It looks small over 1–2 years, but it builds up through compounding. At 2%, purchasing power falls about 18% over 10 years and by half over 35 years.
Quick checkThe deposit rate is 4% a year and inflation is 2.5%. What is the real interest rate, roughly?
About +1.5%. 4% − 2.5% = 1.5%. Interest is higher than inflation, so the power of the money is growing slightly. Calculated exactly, 1.04 ÷ 1.025 − 1 ≈ 1.46%, which is almost the same.

STEP 3Checking with Korean and US inflation

Now that you know how to calculate, let's apply it to real numbers. Over the past 20 years we have lived through, how much have prices risen, and how much has the power of our money shrunk?

Inflation over 20 years

Annual consumer price inflation in Korea and the US (2006–2025)

0%2%4%6%8%2006 Korea 2.2%2006 US 3.2%'062007 Korea 2.5%2007 US 2.9%2008 Korea 4.7%2008 US 3.8%'082009 Korea 2.8%2009 US -0.4%2010 Korea 2.9%2010 US 1.6%'102011 Korea 4.0%2011 US 3.2%2012 Korea 2.2%2012 US 2.1%'122013 Korea 1.3%2013 US 1.5%2014 Korea 1.3%2014 US 1.6%'142015 Korea 0.7%2015 US 0.1%2016 Korea 1.0%2016 US 1.3%'162017 Korea 1.9%2017 US 2.1%2018 Korea 1.5%2018 US 2.4%'182019 Korea 0.4%2019 US 1.8%2020 Korea 0.5%2020 US 1.2%'202021 Korea 2.5%2021 US 4.7%2022 Korea 5.1%2022 US 8.0%'222023 Korea 3.6%2023 US 4.1%2024 Korea 2.3%2024 US 2.9%'242025 Korea 2.1%5.18.0KoreaUSInflation target 2%

Sources: annual percentage change in Korea's Consumer Price Index (2006–2025), from Korea's national data agency (formerly Statistics Korea); US consumer price inflation from the World Bank (FRED FPCPITOTLZGUSA, available through 2024). Checked 2026-10-05.

Korean inflation stayed between 1% and 3% in most years. It was very low, at 0.x%, in 2019–2020, then reached 5.1% in 2022, the biggest rise in 24 years since 1998 (7.5%), during the Asian financial crisis. The US was at 8.0% that same year. After that, Korea came closer to the target level, with 3.6% in 2023, 2.3% in 2024 and 2.1% in 2025.

Numbers that look low add up to a lot. Calculated from the national data agency's annual rates, Korean prices rose about 58% over the 20 years from 2004 to 2024. KRW 10,000 in 2004 is worth about KRW 6,300 in 2024 terms. For a closer example, with the Consumer Price Index at 100 in 2020, it stands at 120.43 in September 2026. KRW 10,000 in 2020 is now worth about KRW 8,300.

Cumulative inflation and purchasing power were calculated by Robin Invest from figures published by Korea's national data agency. Source for the September 2026 Consumer Price Index: Korea's national data agency, Consumer Price Index (released October 2026).

Real interest rates in practice: end of 2022 vs. now

Let's apply the real interest rate from STEP 2 to the Bank of Korea's .

December 2022

Policy rate3.25%
Inflation5.0%
Real policy rate about −1.75 pp

September 2026

Policy rate3.00%
Inflation2.9%
Real policy rate about +0.1 pp

The policy rate is the rate in effect at each point in time (3.25% decided on 2022.11.24, 3.00% decided on 2026.8.27), and inflation is the YoY rate for that month. Sources: Bank of Korea policy rate history; consumer price trends from Statistics Korea and Korea's national data agency. Checked 2026-10-05.

During 2022, the Bank of Korea raised the policy rate seven times, from 1.00% to 3.25%. Even so, inflation rose faster, so the real policy rate was negative through the end of the year. In September 2026, with the policy rate at 3.00% and inflation at 2.9%, the real rate is near 0%. Before that, the Bank of Korea raised the policy rate from 2.50% to 3.00% in two steps, in July and August 2026. How central banks consider inflation and the real interest rate when setting rates is covered in detail in Lesson 13.

For stocks: inflation shakes both knobs

Apply the 'stock price = earnings × multiple' formula from Lesson 1 to inflation. Inflation shakes the two knobs in different directions.

Inflation situationEarnings knobMultiple knob
Moderate inflation (around 2%)Generally + Prices edge up, so nominal revenue and earnings grow naturally.Interest rates are stable, so the burden on the multiple is small.
High inflation (4% or more)Varies by company Companies with pricing power hold up, while companies that absorb the higher costs see their earnings shrink.Generally − Central banks raise rates, so the discount rate rises and the multiple shrinks. 2022 is the classic example.
Signs of stabilizing inflation (slowing rate of increase)The cost burden eases.Generally + Expectations of rate cuts make it easier for the multiple to recover.

There is one more thing to remember. In a world where prices rise 2–3% a year, simply holding cash definitely erodes your purchasing power. This is one of the reasons many people take on risk and invest in assets such as stocks, where earnings grow too. You can estimate the real return of your investment by finding your annual return with the Return & CAGR Calculator and then subtracting the inflation rate. Which assets held up relatively well when inflation rose is covered in Lesson 11, and which sectors are favored by current inflation can be seen on the Macro Map.

This is not always the case. Even with high inflation, stocks can rise if earnings grow faster, and even with low inflation, stocks can fall if recession worries are large. Inflation is the starting point for asking 'which knob will move harder.'

Quick checkYou earned 6% on stocks over one year, and prices rose 5.1% that year. By how much did the power of your money actually grow?
About 0.9%. 6% − 5.1% = 0.9% (exactly, 1.06 ÷ 1.051 − 1 ≈ 0.86%). On your account the number grew 6%, but after subtracting inflation, what you can buy grew by less than 1%. Always look at returns together with inflation.

✓What we learned today

  • Inflation is the phenomenon of prices in general continuing to rise, and viewed the other way, it is a decline in the amount the same money can buy (purchasing power).
  • Purchasing power shrinks by compounding. Purchasing power = amount ÷ (1 + inflation rate)years. If prices rise 3% every year, KRW 10,000 in 10 years is worth about KRW 7,440.
  • Real interest rate ≈ nominal interest rate − inflation rate. If deposit interest is lower than inflation, the number grows but the power of money shrinks. At the end of 2022, Korea's real interest rate was negative, with a policy rate of 3.25% and inflation of 5.0%.
  • Korean prices rose about 58% from 2004 to 2024. KRW 10,000 in 2004 is worth about KRW 6,300 in 2024 terms.
  • Moderate inflation raises a company's nominal earnings, but high inflation brings rate hikes that cut the multiple. Apply the two knobs from Lesson 1 to inflation as well.
Continues in the next lesson · Lesson 8How to read CPI: headline vs. core

Now that you know inflation reduces the power of money, the next lesson covers how inflation is actually measured. You will learn how to read the CPI that appears in the news every month, split into headline and core, and YoY and MoM.

Quiz5-question quiz

Pick an answer and it's graded right away with an explanation.

Q1. Which of the following best describes 'inflation'?

Q2. If prices rise 3% every year, roughly how much power will today's KRW 10,000 have in 10 years?

Q3. Using the Rule of 72, roughly how many years does it take for the power of money to halve when prices rise 4% a year?

Q4. With a deposit rate of 3% a year and inflation of 5%, which statement about the real interest rate and its meaning is correct?

Q5. In a period when inflation is rising quickly above 4%, what is most likely to happen to the 'multiple (P/E) knob' from Lesson 1?

NextTerms · Next lesson · Related tools

InflationInflation

A phenomenon in which prices keep rising across the board. What the same money can buy shrinks.

Purchasing powerPurchasing power

The amount of goods and services the same money can buy. When prices rise, purchasing power shrinks in a compounding way.

CPIConsumer Price Index

The main price indicator showing changes in the prices of goods and services households buy. It is usually released as the rate of increase versus the same month a year earlier.

Real interest rateReal interest rate

The nominal interest rate minus the inflation rate (approximately). If it is negative, the power of your money shrinks even though you earn interest.

Rule of 72Rule of 72

72 ÷ annual rate ≈ the time it takes to double (or halve). At 3% inflation, purchasing power halves in about 24 years.

Inflation targetInflation target

The inflation rate a central bank aims for. The Bank of Korea targets 2% consumer price (CPI) inflation (since 2019), and the US Fed targets 2% PCE price inflation.

Policy ratePolicy rate

The policy interest rate set by a central bank (the Bank of Korea, the US Fed). It is the starting point for all other interest rates.

Interest rateInterest rate

The price of borrowing money. When rates rise, the present value of future earnings falls, which tends to lower stock multiples.

DeflationDeflation

A phenomenon in which prices keep falling across the board. It can create a vicious cycle in which spending is delayed and company profits shrink.

Discount rateDiscount rate

The rate used to convert future money into today's value. It is usually set as an interest rate plus a risk premium. The higher the discount rate, the smaller the present value of future earnings.

LiquidityLiquidity

The amount of money released into the market, or how easily an asset can be converted into cash. When there is plenty of liquidity, asset prices tend to rise.

Put what you learned to use right away

Compound Interest Calculator→Return & CAGR Calculator→

This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.