Inflation can impact investment in several ways, as it erodes the purchasing power of money over time. For example, if an investor earns a return on their investment that is lower than the rate of inflation, they are effectively losing money. This is because the real value of their investment decreases as prices rise.
One way to illustrate this is through the effects of inflation on fixed-income investments, such as bonds. If an investor holds a bond with a fixed interest rate of 3% per year, but the inflation rate increases to 4%, the real return on the investment becomes negative 1% after accounting for inflation.
Investors typically seek investments that can outpace inflation to preserve and grow their wealth over time. This is why it is important to consider the impact of inflation when making investment decisions.