How does inflation affect discount rate?

Inflation affects the discount rate by causing the purchasing power of money to decrease over time. As inflation rises, the value of future cash flows decreases, leading to a higher discount rate. This means that a higher discount rate is used to discount future cash flows in order to account for the decrease in purchasing power due to inflation. As a result, the present value of those future cash flows will be lower, making investments less attractive.

The effects of inflation are often not directly felt but are played out over a long time, especially long-term investments are vulnerable to inflation.


At Horizon65, we created a mobile app that enabled you to check the effect of inflation on your savings.

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