Inflation refers to increases in the price we pay for goods and services. Because of inflation, $1.00 today will not be worth as much in the future. Even if the rate of inflation remained at a relatively low 3% for the next 15 years, a $1.00 purchase made today will cost $1.56 in 15 years time or another way $1 will only buy .44¢ worth of goods in 15 years time.

Inflation is an important consideration for all investors. If the after-tax return on your investments is less than the rate of inflation, then the real value of your money will decline.

To protect your investments from the impact of inflation you need to achieve at least some capital growth. While fixed term deposits and savings account type investments can give you a regular income, your capital value remains the same. Many people fall into the trap of choosing these investments because they seem to be safe. However, there is a risk that they will not keep pace with inflation and their real value will be eroded.

You should look at the real rate of return you are making on your investment, that is the return after inflation. The important point is not to rely solely on fixed interest investments - balance them out with 'growth' investments like shares and property.

Reproduced with the kind permission of FPA and Macquarie Investment Management Limited