What type of investment is likely to be affected most by inflation?

When considering the impact of inflation on different types of investments, fixed-income securities are particularly vulnerable because they typically provide a fixed return over a specified period. These securities, such as bonds, pay a set interest rate to investors. When inflation rises, the purchasing power of the interest payments diminishes, making them less appealing.

For instance, if an investor holds a bond that pays a fixed interest rate of 3%, but inflation rises to 4%, the real return—the return adjusted for inflation—becomes negative. In contrast, investments such as equities, commodities, and real estate may offer a degree of protection or potential appreciation against inflation, as they can typically adjust in value with rising prices. Therefore, the predictable nature of fixed-income returns, coupled with rising inflation, significantly diminishes their overall value, highlighting why fixed-income securities are most affected by inflation.