How does inflation primarily affect investing?

Inflation primarily affects investing by eroding the purchasing power of money. As prices of goods and services increase, the same amount of money buys fewer items than before. This gradual decrease in the value of money means that investors need to focus on assets that have the potential to grow at a rate that exceeds inflation.

Investing in assets such as stocks, real estate, or commodities can provide returns that outpace inflation, thereby preserving or increasing the investor's purchasing power over time. For instance, if inflation is at 3%, an investment that only yields a 2% return effectively results in a loss of purchasing power. Thus, the necessity for investments to at least match or exceed the rate of inflation is a core consideration in investment strategy, making it crucial for investors to carefully assess their portfolios and ensure they are positioned to combat the impacts of rising prices.