Can We Prepare for Inflation?

price tag; sylvar via Flickr

Editor’s Note: The government reported Wednesday that consumer prices fell in March, indicating a weakened demand for goods and services. But while this price drop raises the specter of deflation, many economists contend that the real risk to the economy is inflation because the Fed continues to pump money into the financial system.

Question: In preparing for inflation (and hyperinflation), is it better to put your savings into “goods” (for example, land, housing, foods, tires for the car for future use) or do nothing?

Paul Solman: Hmmm. What do you mean by “do nothing”? If you’re worried about inflation, here’s what you DON’T want to invest in: long-term bonds. You also don’t want to keep your money under the mattress, since it will lose its value there (even if the waterbed doesn’t leak).

My preferred way of protecting against inflation are the aptly titled TIPS: Treasury INFLATIONPROTECTED Securities, whose virtues I’ve extolled here many times. You can buy them direct from the U.S. Treasury, or via mutual funds like VIPSX (Vanguard) and FIPSX (Fidelity).

Yes, hard assets often perform well in inflationary times, for obvious reasons. But housing, for example, might still be overvalued by historical standards. Same for a Damien Hurst embalmed cow. So I’d be a little careful with “inflation hedges” of that sort. Unless I were buying them strictly for use value, in which case, if you can afford it, why not?