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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.
Download our app and start gaining insight into your current and future finances.
