Inflation risk
What is it?
It is the risk that inflation will reduce the purchasing power of money over time. Inflation implies a widespread increase in the prices of goods and services, meaning that over time, money loses its purchasing power. When the inflation rate is high, the nominal returns on investments may not be enough to offset the rising prices, causing investors to see a decrease in the real value of their returns. In such cases, the return on an investment might not be sufficient to maintain the investor’s standard of living.
This risk is especially relevant in fixed-income investments or assets that do not adjust their value according to inflation, such as bonds or term deposits, as their returns can be absorbed by price increases.
Key aspects to consider
Inflation risk can have a significant impact on long-term investments, as even if an investment generates positive returns, high inflation can reduce the investor’s ability to preserve their purchasing power. To protect against inflation, investors may consider assets that have historically performed well during inflationary periods, such as stocks, real estate, or commodities.
An inflation adjustment is important when evaluating the real return on investments. It is recommended to consider the real return, which adjusts the nominal returns considering inflation. While certain assets may offer a return higher than inflation, investors should be aware that in a high inflation environment, the return on many traditional investments may be reduced.
Additionally, it is important to take into account monetary policies and interest rates, as central banks may raise interest rates to control inflation, which can affect the value of investments and the profitability of portfolios.