Inflation won't be going away anytime soon, but at today's interest rates, your purchasing power may be slipping.
Inflation can, of course, be a significant drain on the amount you can buy in the future with today's dollars. To fight that, investors often use government bonds called Treasury Inflation Protected Securities, or TIPS.
The inflation component of the yield on TIPS is based on the Consumer Price Index, or CPI. The bonds pay a fixed rate of interest, and the principal is adjusted for inflation on a semiannual basis.
The I bond is another option for inflation protection. Two components make up the yield for I bonds: a fixed rate and the inflation rate. Combined, they make the composite rate. The fixed rate will stay with the I bond until maturity while the composite rate will change every six months. Additionally, a new series of I bonds is released every November and May, which feature a new fixed rate.
The current I bond rate for issues purchased between November 2011 and April 2012 is 3.06 percent.
Riskier investments do a better job of fighting inflation -- but investors risk losing principal for the higher returns. For instance, to fight rising food costs, some experts recommend investing in commodities rather than ultra-safe government bonds.
A story from Bloomberg News published on Investmentnews.com, on Dec. 7 made the case for ditching TIPS and putting funds into commodity ETFs.
TIPS, the story reasons, are based on the CPI, and your personal inflation rate may not match the average compiled by the index. Plus, yields on TIPS are influenced by interest rates -- which are currently languishing at historic lows.
From the story, "Tip of the day: Forget TIPS -- invest in inflation itself:"
Louis Stanasolovich, a Pittsburgh-based financial planner and editor of an alternative investment newsletter called Risk-Controlled Investing, believes futures contracts capture more of the rising grocery-store costs than meets the eye. He points out that the price of most products in the supermarket aisle is based on many commodities such as fuel to heat the store, metals to make the farm equipment and gas to power the delivery trucks. Collectively, commodities are an essential part of the equation, he says. To gain protection against that more holistic take on grocery store prices, you would need a more broadly diversified commodities fund.
How do you think about inflation? Do you use specific investments to hedge inflation?
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