Cash Feels Safe, Until You See What Inflation and Compounding Have Taken

Cash can feel “safe” because the balance doesn’t change, but inflation quietly erodes what it can buy over time.

Key Points
  • At 3% inflation, $10,000 can lose more than half its purchasing power over 30 years, while compounding can work the other way.
  • CPKC is built for long horizons, with a hard-to-replicate rail network and continued earnings growth.
  • It’s not cheap and the dividend is small, so it’s best accumulated gradually rather than bought all at once.

Cash has a sneaky way of looking exactly the same while becoming worth less. $10,000 sitting in an account is still $10,000 a decade later. Nothing crashed. No terrifying red numbers appeared. Yet the groceries, housing, travel, and almost everything else that money needs to buy have been getting more expensive in the background.

That problem feels particularly relevant right now. Canada’s Consumer Price Index rose 3% year over year in July, while the Bank of Canada ultimately aims to keep inflation around 2%.

If inflation averaged 3% for the next 30 years, as an example, $10,000 sitting idle would have purchasing power equivalent to only about $4,120 today. Meanwhile, compounding works in precisely the opposite direction.

customer fills up car with gasoline

Source: Getty Images

Time does most of the work

Imagine the same $10,000 earning an average 7% annual return. It would grow to roughly $19,672 after 10 years without another dollar being contributed. After 20 years, it becomes approximately $38,697. After 30? About $76,123.

YEARS$10,000 CASH: PURCHASING POWER AT 3% INFLATION$10,000 COMPOUNDING AT 7%
10$7,441$19,672
20$5,537$38,697
30$4,120$76,123

That 7% return certainly isn’t guaranteed, and emergency savings shouldn’t be tossed into stocks because a table looked scary. Cash has a job. It covers near-term bills and keeps investors from selling stocks at terrible moments.

The trouble begins when money intended for 10, 20, or 30 years from now is treated like emergency cash. For that money, I’d rather own businesses capable of growing alongside the economy. One TSX stock gives investors a particularly interesting way to do it.

CPKC

Canadian Pacific Kansas City (TSX: CP) operates the only single-line railway connecting Canada, the United States, and Mexico. Its roughly 20,000-mile network transports everything from grain and automotive products to energy, chemicals, and consumer goods.

Building a competing railway across three countries isn’t exactly a weekend project. That enormous physical network creates a competitive advantage that’s difficult to reproduce, while CP stock can benefit as North American trade and industrial production expand. It’s the sort of asset I’d much rather own for decades than try to trade around next Tuesday.

The latest results suggest the business still has plenty of momentum. Second-quarter revenue increased 13% to $4.16 billion, while core adjusted diluted earnings per share (EPS) rose 13% to $1.27. Management continues to expect low-double-digit adjusted EPS growth for 2026.

Growing income

CP stock won’t excite investors hunting for enormous passive income today. At roughly $130 per share, its $0.268 quarterly dividend produces a yield below 1%. Yet management increased that dividend 17.5% earlier this year.

For investors who don’t need the income, reinvesting those payments adds more shares, which can then receive future dividends of their own. Combine that with earnings growth and long holding periods, and buying stocks in Canada becomes much more about patience than predicting next month’s market.

There is one obvious catch. CP stock trades around 30 times trailing earnings. That’s a healthy valuation, so disappointing growth could hit the shares hard. Railways are also economically sensitive. Lower freight volumes, trade disruption, tariffs, or weaker industrial activity can hurt results. I’d therefore prefer buying gradually rather than pretending today’s price is irresistible.

Bottom line

Still, investors don’t need every long-term holding to begin with a massive dividend or bargain-basement valuation. Some of the best Canadian blue-chip stocks earn their place by steadily growing the business underneath each share.

Cash will still say $10,000 on the statement years from now. The real question is what that $10,000 will still buy, and what it could have become instead.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

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