Inflation Risk is like a stealth tax eating away at the value of your money. You won’t see a smaller cash balance in your account but you will definitely lose buying power.
The last 10 years from 2004 up to 2014 have seen total inflation of 37.97%. This means 10 years ago if (without taking into account any state pension) you needed pension income of £10,000 per year to maintain your standard of living, today you would need your Pension to be £13797 per annum.
Go back 20 years, and your £10000pa pension income would today need to be £17778 to maintain your standard of living. (Source: This is Money – how the value of money as changed since 1900)
Peering into the future, and assuming the current rate of inflation (2.1% as at August 2014) remains the same, we can see below the reduction in value of £10,000 due to inflation over the next 40 years.
Source: This is Money
Looking at examples below of how the cost of living has increased over the short and long term, we see how prices can rapidly increase.
Looking further back we see how the cost of living over the long term has increased. Figures from 1960 to 2009.