The replacement cost of new buildings, equipment, and plants rises due to inflation, but depreciation rates are set (or reducing) in nominal terms, which causes a drop in real terms over time.
What is inflation?
In the field of economics, inflation is the broad term for a rise in the price of goods and services across an economy. Each unit of currency may purchase fewer products and services as the general price level rises, hence inflation is associated with a decline in the purchasing power of money.
How inflation impacts depreciation?
Price adjustment depreciation comprises both inflation adjusted and replacement cost depreciation because it is assumed that all price increases occur at the rate of inflation.
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