Almost everyone defines inflation as “prices going up”. That is the consequence, not the cause. And mixing the two up changes who you blame.
A village with a hundred coins
Picture an isolated village where 100 coins circulate and 100 loaves of bread are sold each week. Roughly, a loaf costs a coin. One day someone finds a way to make another 100 coins identical to the ones already there. The bread has not changed: same baker, same flour, same 100 loaves. But now there are 200 coins chasing them, and the baker, seeing he is offered more, ends up charging two.
The bread has not become more expensive. What has happened is that each coin buys half. That is inflation: an increase in the amount of currency. Rising prices are what comes after.
The difference matters. If you think prices are rising, you look for culprits among those who sell: the baker, the supermarket, the petrol station. If you understand that it is the currency that buys less, you look at whoever issues it.
Known for almost five hundred years
In the mid-sixteenth century huge amounts of silver and gold were arriving in Spain from the Americas, and prices were soaring without anyone quite understanding why. In 1556 Martín de Azpilcueta, a professor at the School of Salamanca, explained it: where money is scarce, goods and labour are paid with less of it, and where it abounds, with more. There was no more bread or cloth in Castile. There was more silver chasing them. Azpilcueta is regarded as one of the discoverers of what is now called the quantity theory of money.
Who makes the new coins today
Nobody brings in galleons of silver any more. The euro, like every other fiat currency, is not backed by any good: it is created without a physical limit.
Part of it is created by the European Central Bank, but mostly by commercial banks. When a bank gives you a loan, it does not just lend you what other customers have deposited: it writes the amount into your account, and with that entry euros are born that did not exist before. The Bank of England itself explains it.
And it is not a side effect nobody wanted. The European Central Bank’s stated target is not for the euro to keep its purchasing power, but for it to lose it at 2% a year, which its strategy calls price stability.
Why it does not hit everyone the same
Back to the village. The 100 new coins do not appear evenly in everyone’s pocket. Whoever makes them spends them first, while bread still costs one coin. By the time they reach everyone else, the baker is already charging two. The first bought at old prices; the last pays new prices with a wage that has not yet risen.
Richard Cantillon described this around 1730, in an essay not officially published until 1755, which is why it is called the Cantillon effect. Today the first in the queue are the state, whose debt the central bank buys, and the banks, which get the credit before anyone else. The last are those who live on a wage reviewed once a year.
That is why new euros show up first in what is bought on credit rather than at the supermarket. Between the first quarter of 2020 and the first quarter of 2026, Spain’s consumer price index rose 24% and house prices 52.6%.
CPI, year-on-year and core inflation
The consumer price index, CPI, is what national statistics offices publish each month: the price of a basket of goods and services bought by an average household. In Spain, in September 2026 it stood 4.9% above September 2025.
| Term | What it means | Spain, September 2026 |
|---|---|---|
| Year-on-year inflation | How much the CPI has risen compared with the same month a year earlier. | 4.9% |
| Core inflation | The same measure, but without unprocessed food and energy, the prices that jump around most from month to month. | 3.1% |
| HICP (harmonised) | The CPI calculated with a method common to the whole European Union, so countries can be compared. | — |
Core inflation being lower does not mean “real” inflation is lower. Petrol and fruit have to be paid for too. It only means those two groups moved more than the rest.
The problem with the CPI is not in its arithmetic, it is in what it measures. It measures the basket of an average person who does not exist and leaves out house prices as an investment, which is exactly where new euros enter first. It measures well, but where the phenomenon arrives last.
What inflation does to your savings
With prices 4.9% higher than a year ago, 10,000 euros put aside buy what 9,532.89 used to. And with the 2% the European Central Bank aims for, sustained for 30 years, those 10,000 euros end up buying what 5,520.71 buy today. Almost half, without touching them.
Without debasement, the natural tendency of prices is to fall: every year more and better is produced with the same. What reverses that tendency is a currency issued without limit.
The defence is not to hide your savings in the bank, but to keep them in goods whose quantity does not depend on an administrative decision: productive companies and gold, which nobody can create from an office. What is safe and what is not we explain in The safest investment there is.
Educational content. Not personalised financial advice.