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The inflation premium is the additional return that investors demand to compensate for the expected erosion of purchasing power due to inflation. To calculate it, subtract the current inflation rate from the expected real return. Real return is the nominal return adjusted for inflation. Example: If the expected nominal return is 5% and inflation is 3%, the real return is 2% and the inflation premium is 3% – 2% = 1%.
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.