OECD inflation hit 5.2% in 2024 — what that means for every investment decision you make
There is a number most investors celebrate — and a second number they rarely calculate. The first is the return they see on a statement. The second is what that return actually buys after inflation has taken its share. The gap between these two figures has never mattered more than it does right now.
When OECD-wide inflation sat comfortably below 2% for most of the 2010s, the difference between nominal and real ROI was small enough to ignore. That era is over. With OECD annual inflation reaching 5.2% in 2024 and still running at 3.7% through late 2025, a portfolio returning 7% or 8% on paper may be delivering real purchasing-power gains of just 2% to 3%. For long-term savers and retirees, that is a fundamental shift — not a rounding error.
The Formula Most People Skip
Nominal ROI is straightforward: if you invest $10,000 and end the year with $11,000, you earned 10%. Simple. But that figure says nothing about what $11,000 can actually purchase relative to when you started.
The precise formula for real return is: Real ROI = (1 + Nominal Rate) ÷ (1 + Inflation Rate) − 1. At 10% nominal and 3% inflation, that works out to roughly 6.8%, not the 7% you get by simple subtraction. The difference is small at low inflation but compounds into something significant when inflation runs hot.
The practical implication is this: in a low-inflation decade, a 5% nominal return was a solid outcome. In today's environment, that same 5% may leave you barely treading water.
What the Numbers Actually Show
The table below illustrates what happens to a constant 10% nominal return as inflation rises. The deterioration is sharper than most people intuitively expect.
Real ROI at 10% Nominal Return — By Inflation Scenario
| Nominal ROI | Inflation Rate | Approx. Real ROI | Precise Real ROI |
|---|---|---|---|
| 10% | 0% | 10.0% | 10.0% |
| 10% | 2% | ~8.0% | 7.8% |
| 10% | 3% | ~7.0% | 6.8% |
| 10% | 5% | ~5.0% | 4.8% |
| 10% | 8% | ~2.0% | 1.9% |
The journey from 2% to 8% inflation cuts a 10% nominal return from 7.8% real to 1.9% real. That is not a minor adjustment — it is a fourfold reduction in actual wealth creation.
The Long Game: Where Inflation Really Wins
Single-year comparisons understate the problem. Where inflation truly damages wealth is across decades. Consider a 7% nominal return held for 20 years. At 2% inflation, the real rate is approximately 5%, and your purchasing power multiplies by about 2.65 times. At 4% inflation, that drops to a 3% real rate and roughly 1.81 times over the same period — a 46% difference in final outcome from a seemingly modest 2-percentage-point shift in prices.
This is why the inflation assumptions embedded in retirement projections matter as much as the return assumptions. Most financial plans are far more sensitive to the inflation input than people realize.
How Different Assets Hold Up
Not every asset suffers equally when inflation rises. Cash and short-term deposits are the most exposed — their nominal rates rarely keep pace with rising prices, turning positive nominal returns into negative real ones almost immediately. Fixed-rate bonds face the same problem structurally: the coupon was set when inflation expectations were lower, and there is no mechanism to adjust.
Real estate sits in the middle — often cited as an inflation hedge because rents and asset values tend to drift upward with prices, but J.P. Morgan's 2026 analysis notes that higher borrowing costs and rising operating expenses can offset rental income gains, particularly for leveraged investors.
Adjusting Strategy for the New Normal
The most immediate change any investor can make is to stop setting return targets in nominal terms. "I want 5% per year" is not a financial goal — it is a number that could represent excellent real growth in one decade and negative real returns in another. The goal should always be framed as a real rate: "I need at least 3% above inflation to meet my objectives."
From there, portfolio construction follows naturally. Heavy concentrations in fixed-rate instruments should be reassessed. Diversification into assets with genuine inflation-sensitivity — equities in pricing-power sectors, inflation-linked bonds, selectively chosen real assets — makes structural sense when prices are running above central bank targets.
Finally, long-term financial plans — particularly retirement models — need to be stress-tested against scenarios of sustained 3% to 5% inflation, not just the 2% baseline that defined the previous decade. The difference in projected outcomes is large enough that it changes which decisions make sense today.
This article is for informational purposes only and does not constitute financial or investment advice. All return and inflation figures are illustrative examples based on publicly available data (OECD, 2024–2025). Actual results will vary.
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