Summary of Effects of Inflation on Investments

Inflation can be a serious problem for both bond and stock investors alike. Fortunately, in the United States we were blessed with low inflation at many points in the past. But that doesn’t mean inflation has gone away, and the potential for rising inflation is always a possibility.

Not only does inflation erode one’s purchasing power, but it has the effect of lower investment returns—especially on fixed-income investment such as bonds. While there is no clear effect of inflation on equity returns, studies support the position that stock total returns are also diminished by inflation.

A wise investor should always assess the future prospects of inflation and its potential effects on his or her investments. Many investors include investments in their portfolios that hedge against inflation.