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Inflation will eat your CD

By Sheyna Steiner ·
Wednesday, February 20, 2013
Posted: 4 pm ET

In recent history, inflation has not been too much of a problem. In fact, fears of deflation spurred the Federal Reserve to embark on the first quantitative easing program  in 2008. The inflation rate still remains low by historical standards but today's paltry interest rates on savings products such as certificates of deposit and money market accounts make it difficult for savers to earn returns greater than the low rate of price increases.

A recent article by Fidelity Investments examined reasons retirees should be concerned about inflation and what they can do about it. One option could be using what the article calls "real return" investments, or securities that hedge inflation or interest-rate risk. That could be Treasury Inflation Protected Securities, or TIPS; floating rate securities, commodities or real estate. Today's CD rates make them a poor choice for fighting inflation.

From "Get real: Focus on real after-tax returns:"

After a decade of low inflation, some investors have become somewhat complacent about the threat of inflation, but even low levels of inflation can really erode buying power -- and the risk of higher inflation down the road is real," says (Joanna) Bewick. "So, in my opinion, it's an incomplete strategy to be investing in fixed income -- whether it's traditional bond income or nontraditional nonbond income -- without considering inflation protection.

Bewick is the lead manager of the Fidelity Strategic Real Return Fund.

Do you worry about the return of inflation? How would you manage inflation?

Follow me on Twitter: @SheynaSteiner.

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