inflationsrisk

Inflationsrisk refers to the risk that rising or unpredictable inflation erodes the purchasing power of money and the real value of financial returns. It is a key consideration for savers, borrowers, and investors because it can affect the real value of cash, debt obligations, and asset prices.

Causes and characteristics: Inflation can be persistent, volatile, or unexpected. Inflation risk is particularly acute for fixed-rate nominal assets (such as traditional bonds) because their nominal payments may not keep up with higher prices, leading to a negative real return. Inflation expectations and policy changes can also move asset prices and financing costs.

Measurement: Analysts use inflation indicators like consumer price indices and inflation expectations. The breakeven inflation rate, the difference between nominal and inflation-protected securities, serves as a market-implied measure of expected inflation. Real yields (nominal minus inflation) capture the inflation-adjusted return.

Implications: For households, inflation erodes purchasing power. For lenders and borrowers, it redistributes real wealth. For portfolios, inflation risk tends to push investors toward assets with some inflation sensitivity, such as inflation-linked bonds, commodities, or real estate.

Management: Common hedges include inflation-indexed securities, real assets, and diversified strategies. Shorter duration and global diversification can mitigate some risks. Tax and liquidity considerations are important when choosing instruments.

Limitations: Inflation is inherently uncertain and can surprise policymakers. Measurement gaps and cross-country differences complicate assessment. Effective management relies on clear risk tolerance and scenario analysis.