The solution to 12 A, page 165 - under Unique Circumstances Establishment of the Gift Fund had increased the Smiths’ dependence on fixed payments. As a consequence of this increased exposure to the eroding effects of inflation, the Smiths’ long-term financial security is significantly reduced. The questions says “low-inflation environment will exist indefinitely”. So why does the answer say “eroding effects of inflation”? Does it refer to the fact that the fixed income investments won’t increase in value due to flat inflation? or that even the equities won’t see much change in price? I am not following what the answer is trying to explain. Any help will be appreciated.
Just because inflation is low doesn’t mean you can ignore it. If inflation >0 it will erode your capital over time.