Sunday, December 26, 2010

Inflation Risk

Inflation risk is the risk that an investment does not generate enough returns over the long run to beat inflation. Because inflation represents a general increase in the prices of goods, a positive inflation rate implies a reduction in the purchasing power of money i.e. if you had a $100 and prices doubled you would only be able to buy half of what you used to be able to buy. Inflation risk is a very real and important risk for investors, and investors need to be aware of what their "real return" is (i.e. investment returns after accounting for tax, fees, and inflation). Investors can take advantage of certain assets with inflation hedging properties; stocks have some element of inflation hedge (if companies can put their prices up faster than the rate that their costs rise), gold, property and other hard assets are also recognized as inflation hedges. There are also inflation linked or inflation protected bonds such as "TIPS".

Synonyms: Inflation, Real return

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