Worried about inflation in the future? Consider TIPS
— -- Current investment wisdom holds that the four horsemen of the apocalypse — pestilence, war, famine and Keanu Reeves — will soon be joined by a fifth rider: inflation.
And, in fact, that's a pretty good argument, given the vast amounts of money being thrown by the government at our financial woes. For that reason, you should be thinking about investing in Treasury Inflation-Protected Securities, or TIPS. But you have plenty of time to mull this one over, so there's no need to rush.
Inflation is a period of rising prices. By and large, we've lived with modest inflation ever since the mid-1980s. The government's consumer price index has risen an average 2.8% annually the past 20 years.
Even modest annual increases in prices, however, erode the value of your money over time. Let's say your sister Sarah got a $1,000 bond on her birthday that pays $50 a year for 30 years. But after 30 years of 2.8% inflation, Sarah's $50 payment would have the purchasing power of $21 now. If you want your money to maintain its buying power, you have to beat inflation.
Economists argue about what causes inflation. Generally, though, inflation is a product of too much demand for goods and services. For example, suppose you buy an artificial moose head and put it on the mantel. Your neighbor admires it and goes out and does the same thing. Pretty soon, everyone wants one, and the price of artificial moose heads soars, because Amalgamated Moose Head, the sole U.S. manufacturer, can't keep up with demand.
This whole example, however, assumes that people have enough extra cash to buy things like artificial moose heads, and at steadily rising prices. In short, inflation occurs when the economy is booming and when the supply of money is plentiful.
A plentiful supply of money tends to make the economy boom, which is where the argument for future inflation comes in. The Federal Reserve, which tends to the nation's money supply, has pushed down its short-term fed funds rate to somewhere between zero and 0.25%. In other words, money is cheap. Furthermore, Congress is considering a massive stimulus package funded with enormous amounts of borrowed money.
Related Stories
ABC News Live