Which risk is specifically associated with the erosion of purchasing power over time?

• A. Interest rate risk.
• B. Market risk.
• C. Inflation risk.
• D. Liquidity risk.

Answer: (C)

Purchasing power over time is about how much goods or services your money can buy as prices rise. Inflation risk is the risk that those prices increase, eroding the real value of money and of future returns. If your investment earns a nominal return of 2% but inflation is 3%, your real return is negative, and your purchasing power declines. This matter is especially important for long-term savers and retirees, where you need growth that outpaces inflation or gains indexed to inflation. The other risks describe different ideas: interest rate risk is about how changes in rates affect asset values, market risk is the broad fluctuation in asset prices, and liquidity risk is the difficulty of selling an asset quickly without a big price concession. Inflation risk is the one that directly ties to the erosion of what money can buy over time.