5 things you can do now to prepare for rising inflation
— -- We all have our little fears: The frayed wire on the coffee maker. That knocking noise from the left-rear tire. The zombies staggering around in the backyard.
For investors, one of the biggest fears today is inflation — a period of rising prices. Inflation erodes the buying power of your money at home and abroad. In a worst-case scenario, it can result in hyperinflation, when a wheelbarrow of bills won't buy a loaf of bread.
Right now, inflation is deader than an army of zombies. But massive government borrowing raises the fear that inflation will rise from the grave and eat your savings. But you can fight back — with five inflation-fighting investments.
The consumer price index, the government's main gauge of inflation, has actually fallen 0.4% the past 12 months that ended in March. A big drop in energy prices was behind much of the drop. And in March, prices of food, housing, clothing and transportation fell. It's no wonder that the government is more worried about deflation — a period of falling prices — rather than inflation. In a deflationary period, falling prices drive companies out of business, debts become progressively more onerous, and consumers put off buying because they figure prices will always be lower later.
To get a true inflationary spiral, you need low unemployment and soaring salaries, neither of which is happening today. The unemployment rate stands at a recessionary 8.5%, and average weekly earnings fell in March.
Worries about inflation are "very premature," says David Wyss, economist for Standard & Poor's. "People are trying to fight the last war." The Bank of Japan prolonged that country's recession for a decade by using inflation-fighting tactics instead of deflation-foiling strategies, he says.
Even if inflation isn't a problem now, however, the massive government debt is one very good reason to fear inflation in the long term. Currently, the U.S. government has $11.2 trillion in outstanding debt, up from $5.7 trillion at the end of 2000. Furthermore, the government's efforts to prop up the banking system will add billions more to the total.
The root cause of inflation is too much money chasing too few goods and services. The big worry: Rather than pay off the debt, the government will simply print more money, and that's inflationary.
In the short term, then, inflation isn't a big problem. As time goes on and the deficit rises, however, inflation could become an enormous problem.
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