Final answer:
Inflation erodes the purchasing power of money saved in traditional savings accounts with a low interest rate like 1% by reducing its real value over time. This complicates long-term planning for goals such as retirement, as the future purchasing power of the savings is uncertain. High inflation rates can further disrupt market forces and complicate financial decisions.
Step-by-step explanation:
Inflation makes it difficult to save long-term in a traditional savings account earning 1% because the purchasing power of the saved money declines over time. If the rate of inflation exceeds the interest rate on savings, the real value of the savings diminishes. For example, with an inflation rate of 2%, the real value of money in a savings account earning 1% interest is effectively reduced by 1%, meaning the saver loses purchasing power.
As a result, individuals trying to plan for long-term goals such as retirement are faced with uncertainty. They must consider not only the nominal value of their savings but also what their money can actually purchase in the future. This planning is complicated by the fact that future rates of inflation are unpredictable, and a fixed interest rate like 1% may not keep up with rising prices.
Moreover, unexpected inflation can hurt those receiving fixed incomes or interest payments that do not adjust with inflation, while it can benefit those who have debts that become cheaper to pay off in inflated dollars. High inflation rates can disrupt market forces and make it difficult for both individuals and businesses to make sound long-term savings and investment decisions.