Tips For Fighting Inflation

Federal Reserve Chairman Ben Bernanke told Congress earlier this year that he does not see inflation becoming a major threat to the U.S. economy anytime soon.1 But as more than one pundit has pointed out, the Fed doesn’t exactly have a stellar record of anticipating crises. Some critics believe that the central bank was caught unaware by the financial crisis that began in 2008.
Although inflation has been fairly quiet over the past few years, it remains a perennial concern for investors because it reduces the value of money over time. When inflation is low, it just means the purchasing power of a dollar is eroding at a rate that is slow enough not to cause widespread concern.

Fortunately, the U.S. Treasury issues a form of debt that could help protect investors from the effects of inflation. If you are concerned about how inflation is affecting your portfolio, you may want to consider Treasury Inflation-Protected Securities (TIPS).

Inflating Principal
The principal value of TIPS increases as the Consumer Price Index (a popular measure of inflation) rises, and the value decreases when the CPI falls. This, in turn, can increase or decrease your yield. TIPS make interest payments twice a year and return the greater of either the original or the inflation-adjusted principal at maturity.


One advantage is that as the principal amount grows, so do the interest payments, meaning that the income generated by TIPS has the potential to rise over time. One disadvantage is that unless you own TIPS in a tax-deferred account, you must pay federal income tax on the income plus any increase in principal, even though you won’t receive any accrued principal until the bond matures.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of TIPS fluctuates with changes in market conditions. If not held to maturity, TIPS may be worth more or less than their original value.

Inflation appears to be under control at the moment, but over long periods even a modest inflation rate can significantly reduce purchasing power. We can help you decide whether inflation-fighting TIPS may be a valuable addition to your portfolio.

1) The Wall Street Journal, April 15, 2010

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The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

For more information regarding inflation-fighting TIPS, contact your Naperville Brokerage Services team at Platinum Financial.