Risk & returns
Inflation risk is the possibility that rising prices reduce the purchasing power of investment income or capital. Fixed nominal payments are especially exposed over long periods.
Make it click
A fixed allowance buys a full basket today and fewer items later when prices rise. The money amount is unchanged, but its practical value has fallen.
Now put that into markets
Cash and fixed coupons can lose real value, while other assets respond differently depending on pricing power, rates, valuation and timing.
Real return adjusts nominal performance for an inflation measure. Inflation-linked instruments reference defined indices with lags and rules.
Match currency, period and relevant price index. Stress spending needs rather than assuming one national basket exactly matches them.
No asset is a perfect inflation hedge in every horizon. Inflation protection can be expensive and market values may fall as rates adjust.
Takeaway
