Series 65: Inflation Risk

Inflation Risk

Inflation is the increase in the costs of goods and services in an economy from year to year, such as the rising price of gas, food, or postage stamps. Inflation risk is the risk that no matter how well your investments perform or how little individual risk they have, they will still fail to outperform inflation, resulting in a loss of an investor’s purchasing power over time. For this reason, inflation risk is also called purchasing power risk. Ironically, the safest investments in terms of a low likelihood of losing your original investment (savings accounts, government securities, etc.) are also those that are typically highest in their risk of not outpacing inflation. Inflation risk is considered a systematic risk, because it affects all securities across all markets.

Fixed-income investments tend to have more purchasing power risk than stocks. This is because they tend to yield lower returns