Inflation risk

Inflation risk

Also called purchasing power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative.

Inflation Risk

The risk that the rate of inflation will exceeds the rate of return on an investment. For example, if the rate of inflation is 5% over a year and the rate of return is 3%, then the investor has effectively taken a loss even though he/she has made a profit in absolute terms. Inflation risk applies especially to fixed-return securities as there is no possibility that the rate of return will increase to surpass inflation. For this reason, some fixed-return securities are inflation-indexed, which means that their nominal returns change, while their real returns stay the same. See also: Treasury Inflation Protected Securities.
References in periodicals archive ?
Inflation risk premia both in the United States and in the euro area remained in, or close to, negative territory.
5%, seemingly weathering the downgrades on the Q1 GDP front following the retail sales miss and the upgrades to inflation risk along with higher yields.
Managing inflation risk is especially important for investors who have retired or are approaching retirement.
The Cleveland Fed model can produce estimates for many time horizons, and it isolates not only inflation expectations, but several other interesting variables, such as the real interest rate and the inflation risk premium.
To the extent that inflation risk is small at short-horizons, nominal short-term bonds are good substitutes for inflation-indexed short-term bonds.
Summary: TEHRAN (FNA)- The International Monetary Fund warned Saudi Arabia of a possible inflation risk, urging the kingdom to take preemptive measures against the potential risk.
The ebbing of inflation risk is now a significant positive for the economy and the bond market.
For example, one measure of expected inflation can come from a derivative known as an inflation swap, which avoids the problem of two different bonds, but it still docs not correct for the inflation risk premium.
Of course, no one can predict the future, and interest and inflation risk may not materialize.
FTSE Group has launched the FTSE Wealth Preservation Unit (WPU), which it says is "a stable global currency unit which aims to allow global investors to preserve wealth over the long-term by providing protection from currency and inflation risk.
Two primary factors are the compensation investors require to hold a security that is less liquid than its nominal counterpart, termed the illiquidity premium, and the insurance value they attach to obtaining protection against inflation risk, known as the inflation risk premium.
Nonetheless, the breakeven spread is still the cost one pays to insure against upside inflation risk, and at present we think that this insurance is very cheap.