A type of risk that arises from the negative effect of inflation on purchasing power. Inflation is a upward movement of the general level of price. Inflation reduces purchasing power, which is a risk for investors in cash equivalents such as fixed-income securities and instruments. Such investments involves inflation risk as holders receive a fixed rate of interest. The main concern for investors holding cash equivalents is that inflation will erode their income generated from such assets.
Inflation risk arises from the possibility that the future real value (after inflation) of an investment, asset, or income stream (cash flows) will erode over time by inflation.
Inflation risk is also known as inflationary risk or purchasing power risk.
