Risk Basics · 6 min read
Inflation and Real Returns
Why a positive return can still leave you poorer, and how to read any return figure properly.
Every return figure you see is nominal unless it says otherwise. In an economy that has experienced high inflation, the difference between a nominal and a real return is not a technicality — it is often the whole result.
Nominal counts pounds, real counts purchasing power
A nominal return tells you how many more pounds you have. A real return tells you how much more you can buy. If a holding gains ten per cent over a year while the general price level rises fifteen per cent, the pound figure went up and the purchasing power went down. Both statements are true at once, which is why quoting only the first is misleading. Roughly, the real return is the nominal return minus inflation over the same period.
- Nominal: how many more pounds.
- Real: how much more those pounds buy.
- Real is approximately nominal minus inflation.
Nothing is exempt, including guaranteed products
A guaranteed nominal return removes the risk that the number falls; it does not remove the risk that prices rise faster than the number. This is the point most often missed about savings products with a declared rate: the guarantee is denominated in pounds, and inflation is precisely a change in what a pound is worth. A product can therefore be completely safe in the sense it promises and still lose you purchasing power over its term.
- A guarantee is expressed in pounds, not in purchasing power.
- Safety of the number is not safety of the value.
- Fixed-rate products carry inflation risk by construction.
Currency movements compound the effect
For an economy that imports a large share of what it consumes, a fall in the currency raises the local price of imported goods and feeds into the general price level. That matters for how you read returns: a holding priced in foreign currency or tied to an international commodity may gain in pound terms partly because the pound moved, while a purely domestic holding sees no such effect but faces the same rising prices. Neither is automatically the better place to be — but the two are not comparable on a nominal figure alone.
- Currency moves feed into domestic prices.
- Foreign-linked holdings can gain in pounds from the currency alone.
- Compare like with like, in real terms.
What this does and does not imply
The honest conclusion is narrow. Inflation means that holding all your money in a form with a low nominal return carries a real cost, and that cost is easy to overlook because the pound balance never falls. It does not follow that you should therefore accept more variability than your situation allows, or that any particular asset reliably beats inflation — assets that have historically outpaced it have also had long periods of not doing so. The useful habit is simply to convert every return you are shown into a real one before comparing it with anything else.
- A stable pound balance can still be a shrinking one.
- No asset reliably beats inflation over every period.
- Convert to real terms before comparing options.
Put it into practice — explore Egyptian mutual funds or compare funds side by side.