How does inflation impact investment returns?

Inflation erodes the purchasing power of money over time, which can negatively impact investment returns. As inflation rises, the real value of returns (adjusted for inflation) decreases, meaning that even if an investment grows nominally, it may not preserve or increase wealth in real terms. For example, stocks and bonds may offer returns that fail to outpace inflation, resulting in lower purchasing power for investors. Additionally, inflation often leads to higher interest rates, which can reduce the appeal of bonds and affect stock market performance, especially for companies with high operational costs.