There's been much talk this month about the end of the Great Recession, woohoo! Wait, what's supposed to happen next?
Some analysts feel that the very measures meant to get us out of the recession will, in fact, spur greater inflation down the road. Recently, Federal Reserve Chairman Ben Bernanke said the economy is improving and unveiled an “exit strategy” from economic stimulus aimed at putting a lid on inflation. No matter how hard policymakers try to keep inflation from happening, however, it is still a fixture of our economy.
Inflation represents a rise in prices—or a reduction in your dollar’s spending power. So how can you protect yourself from declining purchasing power? Here are some strategies you can use to beat inflation.
Investing to Beat Inflation
Certain investments can help you beat inflation. Cash and most bonds are not usually among the investments that are most likely to beat inflation because the inflation rate in the near future will (most likely) out-pace the interest on bonds. You wouldn't be adding to your stockpile so much as just keeping up with inflation. MoneyWeek offers three suggestions for investments that are more likely, in the long run, to help you salvage the value of your hard-earned money:
- Stocks. Over time, the stock market rather handily beats inflation. If you are nervous about individual stocks, you can consider index funds, which are tied to the overall performance of an index, rather than relying on stock picking and hope.
- Gold and other precious metals. Tangible assets are often cited as hedges against inflation. Gold and other precious metals can provide a way for you to retain solid, “real” wealth that is less likely to be eroded by the inflation.
- Index-linked bonds. These bonds are tied to a specific index. Bonds linked to the Consumer Price Index, for example, automatically keep pace with prices. The U.S. Treasury also offers bonds, called Treasury Infaltion-Protected Securities (Stock Quote: TIP), which adjust automatically with inflation so that you receive “real” returns.
Another strategy you can use is to lock in interest yields when they move higher. When inflation is a concern, and interest rates are on the rise, keep an eye on CDs, person-to-person lending and other savings and investment vehicles that offer fixed rates of return. Times of inflation can offer you opportunities to be on the receiving end of those higher prices.