Which statement is true about inflation and long-term investments?

Which statement is true about inflation and long-term investments?

• A. Inflation has no impact on real wealth
• B. Only cash earns above inflation
• C. Inflation automatically increases purchasing power
• D. Returns must exceed inflation to grow real wealth

Answer: (D)

The main idea is that real wealth grows only when investment returns outpace inflation. Real wealth is about purchasing power, not just the dollar amount in your account. If prices rise 3% a year and your portfolio grows 2% in nominal terms, your purchasing power actually falls each year, even though your balance increases. For real growth, the return after inflation (and after taxes and fees) must be positive. For example, a 5% nominal return with 3% inflation leaves about a 2% real growth rate, meaning your buying power increases by roughly 2% annually. The other statements misstate how inflation affects value: inflation does impact real wealth, cash often loses purchasing power when inflation is positive, and inflation does not automatically increase purchasing power.

The main idea is that real wealth grows only when investment returns outpace inflation. Real wealth is about purchasing power, not just the dollar amount in your account. If prices rise 3% a year and your portfolio grows 2% in nominal terms, your purchasing power actually falls each year, even though your balance increases. For real growth, the return after inflation (and after taxes and fees) must be positive. For example, a 5% nominal return with 3% inflation leaves about a 2% real growth rate, meaning your buying power increases by roughly 2% annually. The other statements misstate how inflation affects value: inflation does impact real wealth, cash often loses purchasing power when inflation is positive, and inflation does not automatically increase purchasing power.