Suppose you have $ 200000 in a bank term account you earn 5% interest per annum from this account you anticipate that the inflation rate will be 4% during the year . However the actual inflation rate for the year is 6%. Calculate the impact of inflation on the bank term deposit you have and examine the effects of inflation in your city of residence with attention to food and accommodation expenses.

Amount in Bank = 200,000

Interest Rate = 5%

Amount at end of 1 year = 200,000 * 1.05 = 210,000

Now if the inflation is 4%, according to purchasing power, 200,000 * 1.04 or 208,000 would be able to purchase the same things after 1 year as 200,000 can today.

So that means we will have an extra 210,000 - 208,000 or 2000 at the end of 1 year if we keep the money in the bank.

However, since the inflation is 6%, so according to purchasing power, 200,000 * 1.06 or 212,000 would be able to purchase the same things after 1 year as 200,000 can today.

So we will be losing 2000 if we keep the money in the bank.

So we had kept the money in the bank thinking that we will be able to buy things which are worth 200,000 today, 1 year later and have 2000 left over with us. However, because of higher inflation, next year we will actually be short by 2000 to buy the same things that cost 200,000 today.

We can also look at it in this way.

Real Interest Expected = 200,000 * (5-4)% = 2000

Real Interest Received = 200,000 * (5-6)% = -2000

So we are losing money due to higher inflation,

Because of higher inflation, food prices and accommodation expenses will reise higher than anticipated in the city of residence.