Definition
Inflation Risk
Inflation risk is the danger that rising prices erode the purchasing power of your money and the real value of fixed-return investments over time.
Cash and many fixed-income instruments are especially exposed: if returns barely match or fall below inflation, your wealth shrinks in real terms even as the rupee figure grows. Over long horizons, even modest inflation can dramatically reduce what a given sum can buy, which is why retirement and education planning must be done in inflation-adjusted terms.
Managing inflation risk usually means holding growth assets such as equities that have historically outpaced inflation over the long run, and being wary of locking large sums into low-yielding instruments. For Indian savers, where inflation has often been meaningful, beating it is a central planning challenge.
Related terms
- Longevity RiskLongevity risk is the risk of outliving your savings — that you live longer than your retirement corpus was designed to support.
- Inflation-Adjusted ReturnInflation-adjusted (or 'real') return is the return on an investment after subtracting the effect of inflation, showing the actual growth in your purchasing power.
- Real vs Nominal ReturnNominal return is the headline percentage gain on an investment; real return is that figure adjusted for inflation, reflecting true change in purchasing power.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.