What is inflation risk?

It is the risk that the annual rate of increase in the prices of the goods we buy and services we consume will be higher than you were anticipating. When a higher inflation rate is subtracted from the rate of return your investments are earning, soon you may be left achieving little or no “real” return each year. See Inflation to learn more.

How this risk plays out in the real world

Oct 13, 2021: Social Security cost-of-living adjustment will be 5.9% in 2022, biggest annual hike in 40 years
Oct 13, 2021: Consumer prices rise more than expected as energy costs surge
Sep 17, 2021: Inflation Has Turned $15 an Hour Wages Into a Setback
Oct 13, 2020: Social Security COLA Set at 1.3 Percent for 2021
Aug 30, 2018: U.S. inflation hits six-year high as consumers keep spending
Jul 02, 2018: Venezuela’s inflation hits more than 40,000% as investors dump its currency ‘like a hot potato’
Oct 05, 2017: Netflix is raising its prices starting this month
Oct 15, 2015: Social Security recipients can expect no benefit increase next year
Aug 25, 2014; Three reasons college textbook prices are out of control
Apr 14, 2014: Beef prices hit record high
Jan 04, 2014: Chobani yogurt is latest victim in shrinking grocery case
Sep 14, 2012: Higher gas costs drive up US consumer prices

Connection to other risks

This risk relates to Interest rate risk because as prices rise, lenders will demand higher interest rates to keep pace.

How investors can manage Inflation risk

  1. Select investments whose rates of return are expected to exceed the rate of inflation. For example, don’t buy long-term bonds or otherwise agree to lend your money out at a low fixed rate of interest for a long period of time.
  2. Buy TIPS bonds, a special type of bond issued by the United States government that compensates bond investors for inflation.
  3. Invest a portion of your portfolio in real assets, such as the metals gold and silver, whose values usually rise when the rate of inflation increases.