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
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
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
Other inflation hedges are less volatile and can provide
Here are the pros and cons of several inflation-fighting
Treasury Inflation-Protected Securities have very high credit
quality, are very liquid and are exempt from state and local
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.
Commodities and other hard assets are often good hedges against
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.
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
The trade-off: Stocks can be volatile. Prices do not rise
every year. Many do not provide a lot of yield.