Purchasing Power Risk

Purchasing Power Risk (also known as inflation risk) is the danger that the money you get back from an investment in the future won't buy as much as it does today. Think of it as a silent, invisible thief who slowly steals the value of your money. While your account statement might show a positive nominal return, inflation can erode that gain, leaving you with a negative real return. For example, if your investment earns 3% in a year where inflation is 4%, you've actually lost 1% of your purchasing power. Your money can now buy less, not more. This is one of the most fundamental and often overlooked risks in investing, especially for those who cling to assets they perceive as “safe,” like cash or government bonds. For a true value investor, understanding and defending against this risk is paramount to long-term wealth creation.

Inflation is the persistent rise in the general level of prices for goods and services. As prices go