Inflation (Purchasing-Power) Risk
The risk that rising prices erode the real value of an investment's future payments — hardest on long-term fixed payments like bond coupons and fixed annuities.
On the SIE the tell is the word “long-term” paired with a fixed payment — a 30-year T-bond, a fixed annuity, or a high-quality corporate bond. The trap is reading “guaranteed” or “no credit risk” as “safe”: a default-free long Treasury still loses real value when inflation outruns its yield. When asked for the hedge, the credited answer is TIPS or equities, never “buy a longer Treasury.” Watch the fixed-vs-variable annuity pivot: the fixed annuity’s matching risk is purchasing-power, while the variable annuity’s is market risk — swapping those two is the classic miss.
Don’t confuse inflation risk with interest-rate risk; both punish long bonds, but rate risk hits price today while inflation risk erodes the real value of future cash flows. Because it’s non-diversifiable, “add more bonds” is wrong. Hook: inflation eats the real value of both your coupons and your par — which is why TIPS index the principal to CPI, so the coupon (a fixed rate on a rising principal) keeps pace too.
PlayPrepHQ study notes are written and reviewed against primary exam sources. How we create & review content →