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How Can I Protect Myself From Inflation?


How Can I Protect Myself From Inflation?
Question: How Can I Protect Myself From Inflation?
Answer: If you are looking for inflation protection alone, there are two very good instruments you can purchase from the U.S. Treasury. As always, consult with your financial planner before making any financial decision to be sure this fits within your goals.

TIPS: One way to protect your portfolio from inflation is with TIPS - Treasury Inflated Protected Securities. These pay a fixed rate of interest. However, twice a year the government re-adjusts the principal in response to changes in the Consumer Price Index, as published monthly by the Bureau of Labor Statistics. This means that, as inflation increases, the value of the bond increases. Although the interest rate doesn't increase, holders get a larger cash payment because the percent is applied to a larger principal.

TIPS do well during inflation, but do worse during times of non-inflation or stability. However, over the long haul, they do not do as well as a well-diversified portfolio that includes stocks.

Series I Bonds: The I Bond offers a guaranteed fixed rate of return which it keeps for the life of the bond. It is also affected by a variable rate that is indexed to the CPI, and is reset in November and May. The return you get for the bond is a composite of its fixed rate and the variable rate in effect at that time. To find out each bond's return, go to the Treasury Department's Savings Bond Calculator.

Learn more at the U.S. Treasury web site. (Updated December 30, 2009)

Inflation FAQ

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