Risk
Inflation risk
The risk that rising prices erode what your money can buy, even when the number grows.
How it works
It is the risk that most affects cash and conventional bonds, whose payments are fixed in nominal terms. A 3% coupon during 6% inflation is a guaranteed loss of purchasing power.
Equities and index-linked bonds offer some protection over long periods, though neither is reliable over short ones.
Related terms
- InflationThe rate at which prices rise, which means the rate at which each pound or dollar buys less.
- Real returnReturn after subtracting inflation — the only measure of whether you got richer.
- Inflation-linked bondsGovernment bonds whose principal and coupons rise with an official inflation index.
- Purchasing powerWhat your money can actually buy, rather than how many units of currency you have.
More in Risk
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.