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4 Types of Inflation Risk

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Inflation risk is the probability that the value of assets and investments will be negatively affected by changes in inflation.

1. Price Risk

Inflation affects the price of business inputs such as labor and materials. In some cases, it is difficult for a business to pass these costs on to their customers as higher prices resulting in declining margins.

2. Interest Rates

Inflation is one of the key drivers of interest rates. Governments typically increase interest rates when inflation exceeds their targets. Increases in interest rates can lead to declining asset prices and increased borrowing costs.

3. Purchasing Power

Inflation reduces the purchasing power of savings. This is a risk to anyone who has saved money and is a particular concern for retirement planning.

4. Hyperinflation

Hyperinflation is a condition of extremely high inflation that spirals out of control as a government issues new currency at a high rate to pay an unmanageable debt. Under hyperinflation, prices change so quickly that normal business conditions breakdown. People lose confidence in the currency and begin to trade using hard assets such as gold or barter with goods such as food.


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