What effect does inflation have on systematic risk?

Inflation can significantly erode purchasing power, meaning that as prices rise, the real value of money diminishes. This impacts consumers' abilities to spend, as well as businesses' costs and profit margins. When inflation is high, it can lead to uncertainty in the economy, which affects investment decisions and market stability. For investors, rising inflation can diminish the real returns on investments, as the nominal returns may not keep pace with the increased price levels. This uncertainty can amplify systematic risk, which encompasses risks that affect the entire market or economy rather than being confined to a particular sector. Hence, the connection between inflation and systematic risk lies in how inflation influences overall market dynamics and investor behavior.