Your grandfather may have told you that one franc bought a whole bag of sweets. Today, a franc barely buys one. The sweets haven’t got better. The franc has lost its strength. That’s called inflation.
Where does inflation come from?
Imagine a playground where everyone swaps marbles for trading cards. One day, someone hands out whole bags of new marbles. But there are still just as few cards. What happens? You need more marbles to get a card.
That’s the idea economist Milton Friedman championed: when the amount of money grows faster than the things there are to buy, each franc buys less. Money is created by central banks and through bank lending; families have no say in it, but they bear the consequences.
The piggy bank trap
Switzerland is lucky to have fairly low inflation. But even low inflation nibbles away. At 2% a year, a CHF 100 note hidden in a drawer buys only what CHF 50 buys today after 35 years. Nothing has disappeared, yet half its value has evaporated.
That’s why keeping all your money in cash or in an account that pays nothing isn’t “risk-free.” It’s a slow, invisible risk.
How to protect yourself
Part of your money should go into things that tend to keep up with or beat rising prices over the long run:
pieces of companies (shares), whose prices and profits rise with inflation over time;
property, whose rents often follow prices;
a little gold, which has survived centuries and currency crises.
Careful: in the short term, even these investments can fall when inflation surprises everyone. Researchers showed this back in the 1970s. That’s why you choose them for the long term, and you mix them.
Try this tonight with your child
Pick 3 things they love (an ice cream, a magazine, a toy). Write down today’s prices on a sheet and seal it in an envelope marked “open in a year.” Next year, compare. Nothing beats proof they collected themselves.
Further reading
Friedman, M. (1963). Inflation: Causes and Consequences. Asia Publishing House.
Fama, E. & Schwert, G. W. (1977). Asset returns and inflation. Journal of Financial Economics, 5(2).
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Educational content, not investment advice.