What describes the risk associated with inflation in investing?

The correct answer focuses on how inflation directly affects the purchasing power of money over time. When inflation rises, the cost of goods and services increases, which means that the value of currency declines. This diminishing purchasing power impacts investments, as it may offset any returns achieved. Even if an investment grows nominally, if inflation is higher than the growth rate, the real return (the return after adjusting for inflation) can be negative. Thus, the risk associated with inflation emphasizes the importance of considering how inflation erodes the value of returns in real terms, making it crucial for investors to account for inflation when evaluating their investment strategies.

Other options do touch on various risks related to investing but do not specifically address the unique risk associated with inflation in this context. For example, losing principal refers to the risk of losing the initial investment amount, while high volatility pertains to the fluctuation in asset prices rather than just the impact of inflation. Guaranteed returns allude to investments that promise fixed returns, contrasting with the inherent uncertainty that inflation presents.