Inflation Risk
The risk that rising prices erode the purchasing power of an investment's returns.
Formula
Real Return = (1 + Nominal Return) / (1 + Inflation Rate) - 1
Unit
%
In depth
Inflation risk is the reason a nominally safe investment can be genuinely unsafe: a fixed deposit paying 6% while inflation runs at 6.5% loses purchasing power with complete certainty. It is the dominant risk for long-horizon investors, since the erosion compounds — at 6% inflation, money halves in purchasing power in about twelve years. Equities and real assets offer partial protection because revenues and asset values tend to rise with prices, though the protection is unreliable over short periods. Fixed-rate bonds carry it in full, which is why long-dated fixed-rate debt is the most inflation-exposed conventional asset.
Worked example
A 7% nominal return with 6% inflation gives a real return of 1.07 / 1.06 - 1 = 0.94%. The account balance grew by 7%, and what it could buy grew by less than one percent.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Inflation Risk” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.