What is Inflation Risk? Inflation Risk aka. "Purchasing Power Risk" is the risk due to "a decrease in purchasing power of assets or cash flow" due to inflation. A typical example would be a bond that generates a fixed rate of return. For instance, suppose this bond is worth $1000 and generates a 5% yield i.e. $50. Suppose when you purchase the bond that $50 will buy two tanks of gas for your car. Over time inflation will reduce the purchasing power of that $50 so it only buys one tank of gas. If you are counting on using the proceeds of the bond to buy gas there is an "inflation risk" that eventually you will not be covered. The worst-case example of inflation risk is if a country … [Read more...]