What is inflation, and what does it do to your money?

Inflation is the rate at which the average price level of goods and services rises over time. When prices rise, the same money buys less: bread, rent, school, transport. The number on your bank balance can stay the same and you can still get poorer, because what that number buys has shrunk underneath you. The bread that cost 100 in 2010 costs more in 2026; how much more is the country's cumulative inflation, and that is what the experience below makes concrete.

Two words separate clear thinking on this from confusion. Nominal is the number you see, the one printed on the cash. Real is what that number buys, after stripping out inflation. Real return = nominal return minus inflation, roughly. A savings account paying 5% per year in a country with 7% inflation is losing 2% of purchasing power per year, even though the digits on the statement go up. That gap is the silent tax inflation imposes on cash, and the longer it runs, the more it compounds.

Inflation matters more in LATAM than in the US because LATAM has a longer memory of double- and triple-digit episodes. Argentina recorded above 200% in 2023. Brazil remembers the hyperinflation of the late 1980s and the Plano Real that ended it in 1994. Mexico devalued the peso by half in 1994-95. These are not abstract economics: they shaped how households save, why dollarisation is reflexive, and why teaching investing in LATAM has to start here.

LATAM has lived inflation, not read about it. Argentina's cumulative inflation 2010 to 2026 is several hundred-fold, meaning a peso saved in 2010 buys roughly two pesos of 2010 goods today. Brazil ran the Plano Real in 1994 to end annual rates above 2,000% and rebuild the currency from scratch. Mexico devalued in 1994-95 in a chain of events that took the peso from 3.4 to 7.6 against the dollar in months. Chile and Colombia have recently had their own jumps from quiet baselines. Inflation is a recurrent feature of the regional financial landscape, not a one-off, and any household that saves only in local currency carries the consequence of that.

Three threads pull this together for the LATAM investor. First, in real terms, compound interest only works when the rate exceeds inflation. A 4% deposit account in a country with 6% inflation compounds backwards. Second, currency itself is an asset class, and one of the most LATAM-relevant forms of diversification is across currencies, not just across stocks. Third, USD-denominated ETFs have served as a practical inflation hedge for LATAM households over the past decade, because the underlying assets are priced in a currency that has not lost a third of its value over the period, especially when paired with monthly contributions that smooth FX timing risk. None of this is a recommendation. The page describes outcomes, not policy.