With the depression talk gone and things improving in the economy, we seemed to be poised for an economic recovery. However I haven’t heard enough about a concerning problem that we will be facing going forward, so I thought I might be the bearer of bad news. Please start to be on the lookout for Inflation!

After the war time spending and corporate bailouts, the US government has been printing money at an alarming rate. This does come at a price, however, and that price is inflation. This problem is made worse by the fact that some people who were hit hard in their investment accounts recently, moved out of the market altogether and most likely went into a cash or money market account. Sadly, if these people don’t start thinking about inflation, they could be hit hard again by staying in the “safer” money markets accounts while inflation runs rampant. For the month of March 2009 there was actually deflation (prices for goods went down), based on the information from the Bureau of Labor Statistics. The Fed Fund Rate is so low that there is no actual number for it. It is in a range of 0.0–0.25%. Using historical averages as guide, I don’t think inflation will be low for long. Don’t take my word for it though, Ben Stein in his most recent article on Yahoo Finance concurs.

So how can you be protected from this future inflation? On the fixed income side, I would start looking at Treasury Inflation Protected Securities (TIPS). Basically these bonds that pay interest twice a year, are meant to protect against inflation (as you could have guessed from the name) by being linked to the CPI measure for inflation. They will increase in value as inflation increases. These bonds can be purchased directly from the US government through www.TreasuryDirect.gov. This option is the best for diversifying in a bond portfolio.

For an equity inflation hedge, there are inflation protected bond funds like the Vanguard Inflation-Protected Securities Fund (VIPSX) or Fidelity Inflation Protected Bond Fund (FINPX). For these funds at least 80% of its assets are invested in TIPS. An interesting alternative fund I just found reading this article on CNNMoney.com was the Tax Aware Real Return Fund (TXRAX). This fund uses tax municipal bonds and inflation linked swaps to track the Consumer Price Index, which is used to measure inflation. Finally, if you want to buy an ETF to protect against inflation there is the iShares Barclays TIPS Bond (TIP). In the ETF case 95% of the funds assets are invested in TIPS. I know many people like to use Gold the commodity or GLD ETF as a hedge for inflation but I would rather use a more pure form to hedge against inflation, as gold can have many other factors that influence its price. It would be a shame to use gold as a hedge and only to not have it work as well as one would like. One note of caution all of these will decrease with deflation, so don’t start loading up on anything yet. Just starting thinking about buying some of these securities on when the time is right.

Please note: there is no recommendation to buy or sell here and ModernMoneyBlog.com will not be held responsible for any action on your part. This is for informational purposes only.