For a long time, I was a fan of inflation-protected investments. I have to say that it's difficult to ignore the benefits of investments that are positioned to stay ahead of or at least keep pace with inflation. For many years, I felt that one great way to combat inflation was through government series-I savings bonds. Lately though, I've been somewhat disillusioned with these investment vehicles and they just don't seem to be working for me.
Personal Inflation Rate
I've been tracking my own expenses since I was 18. As our family has expanded, so has my tracking, taking on my wife's expenses, and now handling our kids' expenses in addition to that. Why is this important? Well, it gives me the ability to determine our personal inflation rate. This is the rate that our personal costs increase year-over-year.
For many years, this rate averaged right around 3 percent. However, of late -- with tax and health care increases -- this rate has suddenly jumped closer to 5 percent. Knowing this number is critical to the success of our future planning as it gives us a point of return upon which we can evaluate how our investments are performing. Returns on investments above 5 percent and we're making some headway, below that amount and we're falling behind.
Government Reported Rate
Then of course, there is the number that the government "reports" to us as their Consumer Price Index rate of inflation. This is all well and good (although I personally feel that they manipulate this number), but it doesn't necessarily correlate with our personal numbers.
According to the government, this number has been hovering right around 2 percent as of late, and they are looking to keep it in this area in the near future. I think that many people would tend to agree with me that this number seems a bit low, and that having a personal inflation rate at which to look could certainly be more helpful. The government's number also has an affect upon my inflation-based investments.
Government Inflation Rate Effects on Inflation-based Investments
It's all well and good that the government wants to make inflation appear low; however, for those of us that have inflation-based investments, that's not really helpful. Whether it's I-series (inflation based) government savings bonds or commodities like gold and silver that can be affected by things like inflation, economic insecurity, or the strength of the dollar, there are certain investments that can be hurt when inflation is low or at least reported as low.
This however doesn't mean that I'm willing to give up on inflation-based/protected investments as they can still act as a crucial hedge for future inflation. Just because current inflation rates are low, it doesn't mean they will stay that way, and I think that incorporating them into my portfolio -- although maybe in smaller amounts than I would were inflation higher -- can help cover my bases against future inflation rate increases.
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More From This Contributor:
- Politics & Government
- Inflation Rate