What impact does inflation have on investments?

Inflation erodes purchasing power, which is a critical concept in understanding how it affects investments. As prices rise due to inflation, the same amount of money buys fewer goods and services than it did before. This means that nominal returns on investments may not keep pace with the rising cost of living, reducing the real value of investment gains.

For example, if an investment yields a return of 5% annually but inflation is at 3%, the real return is only 2%. This diminishing purchasing power can significantly impact investors' strategies, as they need to seek investments that outpace inflation to maintain their financial well-being. Understanding this relationship is essential for making informed investment decisions, as it helps individuals assess whether their investments can maintain or grow their value in real terms, not just nominal terms. It highlights the importance of considering inflation when evaluating investment options and strategies.