Imagine putting 100 German marks in your pocket back in 1990 and forgetting about them. Today, those 100 marks (converted to kunas, then to euros) would buy you — well, roughly two coffees and one pastry. Without sugar. That’s inflation in a small, painful, everyday dose.
Inflation is one of those words everyone uses, but few can explain without sounding like an economics professor giving a final exam. So today, we’ll do it differently — no dry definitions, plenty of real-world examples, and a dash of humor. Because if we’re already losing money’s value, we might as well have a laugh while someone explains it to us.
What is inflation, simply put?
Inflation is — a general rise in the price level. In other words, the same amount of money buys less and less over time. It’s not just “things got more expensive” for one product, but a trend that affects the entire economy.
The easiest way to understand inflation is to imagine money as a fresh loaf of bread. Today, it’s worth a whole loaf. In a year, that same money is worth half a loaf. In five years — a crumb. You didn’t eat that bread, but someone else did. That someone is called inflation. And it has a healthy appetite.
How does inflation happen? Three main causes
1. Too much money, too little goods (demand-pull)
Imagine the central bank decides — out of the blue — to print a billion euros and give them to every citizen. Suddenly everyone has more money. What happens? Everyone goes shopping. But there’s only so much goods. Merchants see people buying en masse — and raise prices. Result? Prices go up, and you’re richer only on paper. Literally.
This type of inflation happened globally after the pandemic. Governments injected massive amounts of money into the economy (stimulus, support, payouts), demand exploded, but supply chains lagged. Result? Prices went down — they just went down upward.
2. When costs rise (cost-push)
Imagine a bakery. If flour prices jump by 50%, the baker has to raise the price of bread. If electricity prices also jump, he raises prices again. And so on in a cycle. When basic raw materials and energy get more expensive, that wave spills over to everything else.
We all felt this when gas and electricity prices skyrocketed in 2022. It wasn’t just utilities that got more expensive — literally everything did, because energy is embedded in every product. From bread to smartphones. Even coffee, that sacred daily ritual, got more expensive. And that, let’s be honest, was personal.
3. Self-fulfilling prophecy (built-in inflation)
This is the most insidious form. When people expect inflation, they start behaving in ways that create it. Workers demand higher wages because “everything is more expensive.” Employers raise prices to cover those higher wages. And there you have it — a vicious cycle. Like being on a merry-go-round that keeps speeding up, and the ticket price keeps rising.
How is inflation measured?
In Europe, including Croatia, inflation is measured through the Harmonized Index of Consumer Prices (HICP). The statistics office collects prices each month for a basket of several thousand products and services — from bread and milk to airline tickets and daycare. Then they compare with the same month last year. The difference? That’s inflation.
Interesting detail: the basket is regularly updated. If people start drinking less milk and more plant-based drinks, those enter the basket. So inflation tracks what we actually buy, not what economists wish we’d buy.
The European Central Bank’s (ECB) target inflation rate is 2%. Think of it like room temperature — 22 degrees is ideal. Below that is cold (deflation, recession, disaster), above is hot (high inflation, burning holes in pockets). The ECB’s job is to maintain that temperature. In the summer of 2022, the temperature spiked to over 10% in many European countries. Not comfortable at all.
Who benefits from inflation? (Yes, there are winners)
Inflation isn’t all evil. Like most things in life, it has winners and losers.
Winners:
- Borrowers with fixed rates. Have a 30-year mortgage with a fixed rate? Inflation is your best friend. While you pay the same amount each month, the value of that amount drops. In other words, your loan “melts” by itself. That’s why smart people prefer to borrow when inflation is high.
- Governments. Governments are the biggest borrowers. Inflation reduces the real burden of their debt. That’s why governments, historically speaking, rarely truly wanted low inflation.
- Asset owners. Real estate, stocks, gold — all of these typically rise with inflation. While your cash in a savings account loses value, your apartment quietly works for you.
Losers:
- Savers. If your money sits in a regular checking account or savings account with 0.01% interest, and inflation is 5%, you’re losing 5% of value every year. It’s like someone taking a bill from your wallet every month while you sleep.
- Pensioners on fixed incomes. This is the most painful group. Pensions that grow slower than prices mean a real decline in living standards.
- Workers whose wages don’t keep up. If your boss gives you a “3% raise” and inflation is 8%, you’ve actually gotten a 5% pay cut. Congratulations, you’re working more for less.
How to protect yourself from inflation?
Here are some concrete strategies:
- Invest, don’t just save. Money in a savings account is like ice in the fridge — eventually it melts. Stocks, ETFs, and real estate are the only way to preserve value long-term.
- Diversify. Don’t put all eggs in one basket. Have some in stocks, some in bonds, some in real estate, some in gold. If it all sounds complicated, start with one global ETF — it already diversifies for you.
- Consider inflation-linked bonds. Many governments issue bonds whose yield tracks inflation. You won’t get rich, but you won’t lose value either.
- Invest in yourself. This sounds cliché, but the best defense against inflation is your skills. If you’re the only person who knows how to fix a certain type of machine, your service will always be valuable — inflation or not.
- Shop smart. When inflation rises, buying in bulk makes sense. A washing machine for $200 might cost $220 tomorrow. But don’t go overboard — ten tons of rice won’t be a liquid asset.
A brief history of inflation
Inflation has shaped world history. In Germany’s Weimar Republic (1921-1923), hyperinflation was so extreme that people used wheelbarrows full of cash to buy basic groceries. Students burned money because it was cheaper than firewood. Seriously — a stack of marks was worth more as fuel than as currency.
More recently, Zimbabwe experienced hyperinflation in the late 2000s, eventually issuing a $100 trillion banknote — which couldn’t even buy a loaf of bread. Venezuela followed a similar path in the 2010s, with inflation reaching over 1,000,000% annually.
In Europe, the post-pandemic period (2021-2023) brought the highest inflation in decades. The war in Ukraine, energy crisis, and supply chain disruptions pushed prices up across the continent, reminding a whole generation that inflation isn’t just something from history books.
What does the future hold?
Inflation in 2025 and 2026 is slowly returning to the targeted 2%, but that doesn’t mean prices have fallen — just that they’re no longer rising as fast. Prices remain at elevated levels. It’s like climbing a hill and now standing at the top — you’re no longer tired from climbing, but you’re still at the top, not in the valley.
The key thing to understand is this: inflation is normal. A healthy 2% inflation rate is a sign of a growing economy. The problem arises when inflation spirals out of control — or when it turns negative (deflation), because then people stop spending and the economy freezes.
A smart approach isn’t to panic, but to understand inflation and adapt to it. So — learn, invest, and keep your money where it works for you, not where inflation quietly eats it for breakfast.
Key Terms
- Inflation: A general rise in price levels — the same amount of money buys less over time.
- Deflation: Falling prices — sounds great on paper, but in practice leads to recession and layoffs.
- Hyperinflation: Uncontrolled price increases, usually over 50% per month. Something you want to avoid.
- HICP: Harmonized Index of Consumer Prices — the official measure of inflation in the EU.
- Demand-pull inflation: Too much money chases too few goods, driving prices up.
- Cost-push inflation: Rising production costs drive prices up.
Hope this was more useful than a dry economics textbook. If you have questions about inflation, investing, or protecting your money — ask away. All topics are welcome. It’s just inflation that isn’t.