Question of the Week – What is inflation risk?

This week our series on risk is looking at inflation risk.

Inflation risk is the risk of losing purchasing power with your money because your investments do not keep up with the rate of inflation. Inflation reduces the purchasing power of money. For example, one hundred dollars buys fewer goods today than it did 10 years ago.

Inflation risk can be more relevant to cash investments or debt instruments like bonds because they have a fixed interest rate. Inflation risk can occur if the rate of inflation is greater than the interest rate paid on your investments.

Equities may offer some protection against inflation because companies can change their prices to keep pace with inflation and maintain value. This may allow share prices to rise in-line with inflation.