Inflation · 6 min read
Inflation and real returns: what your money is actually earning
A return only counts once inflation is taken out. Over long periods in Canada, that one adjustment turns some "safe" savings from a gain into a slow loss.
Compound interest is usually explained in dollars: put money in, earn a percentage, watch the balance grow. What that leaves out is that dollars themselves change value. A balance can rise every year while what it buys stays flat or shrinks. The return that matters is the real return: the growth in buying power, after inflation.
What inflation has done to a dollar
Statistics Canada has tracked consumer prices since 1914. Three numbers from that record show the scale of the effect since 1980:
Statistics Canada Consumer Price Index, annual averages, 1980 to 2025.
None of those years felt dramatic on their own. Inflation averaged under 3% a year, but compounding works on prices exactly the way it works on savings. A quick way to see it is the rule of 72: divide 72 by the inflation rate to get roughly how many years it takes prices to double. At 3% that's about 24 years; at the Bank of Canada's 2% target, about 36.
The pace has also varied a lot by decade. Prices rose about 7.5% a year in the 1970s and 6.2% in the 1980s, then settled near 2% from the 1990s through the 2010s. The 1930s went the other way, with prices falling about 1.8% a year. So far in the 2020s (2020 through 2025) inflation has averaged about 3.2% a year, with the jump concentrated in a few years: prices rose about 6.8% in 2022 alone.
How to turn a return into a real return
The exact conversion divides rather than subtracts:
Real return = (1 + return) ÷ (1 + inflation) − 1. For example, a 5% return in a year with 3% inflation is 1.05 ÷ 1.03 − 1, or about 1.9% in real terms.
Subtracting (5% − 3% = 2%) gets close when both numbers are small, and it is fine for rough thinking. The gap matters more when inflation is high.
Cash and GICs after inflation
Cash rarely shows a loss on a statement, which makes it feel risk-free. In real terms the picture is different. The table below uses 3-month Government of Canada treasury bills (T-bills), a common benchmark for what cash savings can earn.
| Decade | T-bill yield | Inflation | Real return |
|---|---|---|---|
| 1970s | 7.2% | 7.5% | −0.3% |
| 1980s | 11.9% | 6.2% | +5.3% |
| 1990s | 6.5% | 2.1% | +4.3% |
| 2000s | 3.1% | 2.1% | +1.1% |
| 2010s | 0.9% | 1.7% | −0.8% |
| 2020 to 2025 | 2.5% | 3.2% | −0.7% |
Statistics Canada T-bill yields and Consumer Price Index. Before tax.
The 1970s are the cautionary decade: T-bills paid more than 7% a year, which sounds generous, yet buyers lost ground because prices rose faster. The 1980s and 1990s were the opposite, with high rates and falling inflation giving cash a real return of 4% to 5% a year. Since 2010, cash has mostly trailed inflation.
Over the whole record from 1936 to 2025, T-bills earned about 0.7% a year after inflation, before tax. In 39% of those years the real return was negative, and the longest losing streak ran 10 years, from 2013 to 2022. The deepest stretch is the most striking: after inflation, money held in T-bills had lost 43% of its buying power at the worst point, in 1951, and it stayed below its earlier peak from 1937 until 1984.
Tax makes it harder. Interest is fully taxable outside registered accounts. Applying 2026 federal and Ontario tax rates for someone earning about $100,000 to that same history, T-bills lost about 0.6% a year after inflation and tax, so a dollar's buying power shrank to about 59 cents over 90 years.
Five-year GICs tell a similar story by era. In the 1980s they yielded about 10.5% and earned roughly 6.5% a year after inflation. In the 2010s the yield fell to about 1.6%, and the real return was close to zero before tax and about −0.5% after tax at that same income.
Why real returns are the honest yardstick
Looking at real returns changes how different assets compare. Cash and short-term deposits protect against sharp drops in dollar value, but they carry a quieter risk: losing buying power over long stretches. Stocks and bonds can fall sharply, yet over long periods they have historically been the assets that grew faster than prices. Neither kind of risk disappears; they're different risks that matter over different time frames.
It also keeps long-term plans honest. A goal set in today's dollars, such as a retirement income or a home down payment, needs to be compared with real returns, not with the larger nominal numbers on a statement. For that reason the interactive guide reports real returns, in Canadian dollars, unless a label says otherwise. Its slide on inflation risk shows how long "safe" money has taken to recover its buying power after inflationary periods.
Looking ahead, the guide's own assumptions use the Bank of Canada's 2% inflation target and a T-bill yield of about 2.4% as of September 2026. That works out to roughly 0.4% a year for cash after inflation, before tax. That is an assumption, not a forecast; actual inflation can run well above or below target, as the 1970s and the early 2020s showed.
Sources
- Statistics Canada, Consumer Price Index (tables 18-10-0004 and 18-10-0005), 1914 to 2025: purchasing power, inflation by decade.
- Statistics Canada, 3-month T-bill yields from 1936 (table 10-10-0122) and 5-year GIC rates.
- Government of Canada and Ontario 2026 marginal tax rates, applied to history for the after-tax figures.
- Bank of Canada 2% inflation-control target; Statistics Canada T-bill yield, September 2026 (the guide's forward assumptions).
Methods and every data source for the interactive guide: methodology and sources and licences.
Educational, not investment advice. The same information is shown to every reader and doesn't consider anyone's situation. Past returns don't guarantee future results.