Inflation risk

Purchasing power risk:

Variations in returns are due to loss of purchasing power of currency. Inflation is the reason behind the loss of purchasing power. The inflation may be, “demand-pull or cost-push “.

• Demand pull inflation, the demand for goods and services are in excess of their supply. The supply cannot be increased unless there is an expansion of labour force or machinery for production. The equilibrium between demand and supply is attained at a higher price level.

• Cost-push inflation, the rise in price is caused by the increase in the cost. The increase in cost of raw material, labour, etc makes the cost of production high and ends in high price level. The working force tries to make the corporate to share the increase in the cost of living by demanding higher wages. Hence, Cost-push inflation has a spiraling effect on price level.