Steps For Coping With Inflation When It Ramps Up

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Inflation is low now. But the better the economy gets, the sooner inflation is likely to rise.

So what should you do to protect the purchasing power of your money? And -- at this early stage -- are some steps more of a threat to your finances than inflation itself?

Inflation's impact can be huge. "The impact is worst for people in retirement, who are on fixed incomes," said Brian Sullivan, president and chief investment officer of Regions Investment Management.

In the 10 years starting with Dec. 31, 1991, inflation averaged 2.53% annually, according to Regions. By the end of that decade, $60,000 was worth only $46,742.

Inflation will rise in 2013 but not a lot, Sullivan predicts. "It'll rise more in '14." The risk beyond then depends on how deftly the Federal Reserve eventually raises interest rates.

Several types of assets can hedge against inflation. But usually the trade-off is loss of current income.

Gold, which can also be an inflation fighter, can be volatile.

So is it too soon to plunge into inflation hedges that are volatile or low-or-no income? Sullivan says it will only be about one to three years before we know whether the Fed's tsunami of money-printing leads to high inflation. That's a reasonable period to establish your inflation-fighting strategies, he says.

Other inflation hedges are less volatile and can provide income.

Here are the pros and cons of several inflation-fighting strategies.

• TIPS. Treasury Inflation-Protected Securities have very high credit quality, are very liquid and are exempt from state and local income tax.

The trade-off: Their yield is low. Their principal rises with inflation. If inflation stays low, all you get is their paltry yield plus any gain or loss if you sell before maturity.

• Hard assets. Commodities and other hard assets are often good hedges against inflation.

The trade-off: "Their prices and income often don't rise at the same time as inflation or as fast," Sullivan said.

For example, an office building -- which you can own directly or through a REIT or a private placement -- can provide income from rents. It is fairly steady and predictable, but rents may not rise fast. And a timber REIT's income depends on sales of timber and is volatile.

A commodity such as gold generates no income. Stock in gold miners can pay dividends. "In some periods, gold has been out of synch with inflation," Sullivan said.

• Equities. Companies that have pricing power can pass along rising costs of their raw materials to customers. But firms with long-term sales contracts may be barred from passing along costs. Still, in general equities' price increases are a key to staying ahead of inflation.

The trade-off: Stocks can be volatile. Prices do not rise every year. Many do not provide a lot of yield.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

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