The inflation risk expresses the danger of a loss of purchasing power of the invested money due to increases in the general price level.
This risk arises because the value of an investment is expressed in money terms. The buying power of a monetary unit generally decreases over time. This process of a decrease in the value of money is called inflation.
We distinguish between two inflation types:
- Creeping inflation: this leads to an annual depreciation of purchasing power of approximately 2% to 3%. This inflation is hardly noticeable and seldom perceived as serious. Nowadays, it is a part of everyday life in all developed economies.
- One speaks of hyperinflation if annual inflation rates of 10% and more are common. This inflation is obvious for people in everyday life and leads to a loss of trust in the monetary system.
Inflation risk mainly concerns fixed-interest investments and gains in importance as the duration of an investment increases. Besides default risk, it is one of the most important risks for long-term investors.