Inflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in general is growing, hence, the demand to consume stuff is growing faster than the supply of stuff. In any business, when demand grows faster than supply, price rises. Similarly, in a growing economy prices of stuff tend to go on increasing. This also leads to the value of money decreasing. Let’s say today you can buy a kilo of rice for Rs 100 and a year later thanks to this general price rise, its price goes up to Rs 106. Till last year your Rs 100 was worth 1 kg of rice and today its worth just 943 gms. Your money lost 6% value in a year, this is called inflation.

Every year your Rs 100 loses some value. A 6% return on your fixed deposit will simply bring it back up to par and in fat you earn zero.