3 ways to help protect yourself from inflation

The subject of inflation is a hot topic these days as the Federal Reserve continues to pump more and more money into the system. Republican members of congress recently grilled Federal Reserve Chairman Ben Bernanke over whether the Fed’s policies are raising the risk of higher inflation in the months ahead. After all, prices are indeed rising.

Of course Bernanke “blamed higher prices on strong demand from fast-growing countries such as China— not the Fed’s policies to stimulate the economy, including buying $600 billion worth of Treasury debt.”

As far an inflation goes, it is currently low, but what if it rises? Is there anything a person can do to help prevent it or lessen it?

The answer is no. There is essentially nothing you or I can do as an individual to prevent or lessen inflation. That mostly lies in the actions of our Government and the Central Bank (the Federal Reserve). While we cannot stop inflation, there are things and places we can put our money into to help protect ourselves from it.

  1. Treasury Inflation Protected Securities (TIPS) – Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. (source) This is generally thought to be a very safe investment, and as such will provide little to no actual returns. Think of this as almost putting your money away for a while in a safe place.
  2. Invest in commodities – the most common thought of commodity to invest in for protection is gold and silver. Because gold holds value as a precious metal, it is often used as a hedge against lowered economic expectations and crisis. The fact that the price of gold is sky rocketing is a good indication level of investor (un)confidence. There are various ways in which to invest in gold. A person could buy actual gold bars, coins, exchange traded products (ETP’s), certificates, and even gold accounts. When investing in something such as gold, proper research must be done as there is a danger of being a victim of forgery and fraud.
  3. Buy a house – Buying a house does provide quite a few benefits. You lock in your interest rates and also lock in your purchase price. As inflation increases, the amount of principal you pay stays the same, therefore, the higher the inflation the less you are actually paying for your house. For example, a house in 1995 that cost $100,000 would cost $139,414 in 2009. (calculator) This only factors in inflation and does not even count increases from other factors, such as development and standard of living increases. Those that rent will suffer from inflation, as their rates will increase with inflation.

Comments
5 Responses to “3 ways to help protect yourself from inflation”
  1. Great article, and thanks for the investment tips. It’s always frustrating with so much talk about the state of the economy and then feeling frustrated and helpless. I will certainly look into investing in commodities, as it hadn’t crossed my mind, although purchasing a house is out of the question for the moment :-)

    • Gian Sorreta says:

      I would personally look into Silver. The price is much lower than gold but it still has the ability to keep its value in times of both inflation and deflation.

  2. Tam says:

    I like to follow SIVR and it’s been going wild lately. Shares have risen past $40. What’s your outlook on silver now? Is it overvalued as some say and ready to deflate?

    • Gian Sorreta says:

      Keep in mind Silver is used as a hedge against inflation, not as a growth investment. The reason is because prices are literally dictated by the whims of the Federal Reserve and Central Banks.

      With the recent talks of the Federal Reserve planning on increasing interest rates, that will definitely lower the long term value of Gold and Silver because higher interest rates will increase the strength of the Dollar.

      It’s a little crazy how the words of the FOMC can change the prices of Gold and Silver sometimes daily.
      I have another post that talks about that:
      http://www.thesmalltimeinvestor.com/2011/03/interest-rates-news-you-shouldnt-ignore/

    • Gian Sorreta says:

      I should also add, that if the Fed decides NOT to increase interest rates then there will be another run on Gold and Silver.

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