Today the Federal Reserve decided to keep interest rates steady at 2%, saying that they expect inflation to “moderate” in the future. But think for a second about the amount of money you spend every month. If you’re like most people your expenses have probably gone up a lot more than 2% thanks to the rising cost of energy and food. When the Fed looks at inflation numbers, they generally consider “core” inflation, which does not include food and energy. So the numbers are greatly exaggerated versus reality.
There is a great primer on inflation over at Bullion Vault written by the founder of the Implode-O-Meter website. It is well worth taking the time to read, as inflation is something that has a great impact on your financial well-being.
If you have any debt at all, especially if you’re paying an interest rate greater than 5%, it is wise to pay it off over saving money in a low interest account. Even CD’s at the bank are not likely to earn over 5% interest, which means that you are losing money to inflation if you have cash savings. But then again having a decent amount of cash on hand, around 2-4 months living expenses, can bring comfort in the case of an emergency.
If you must invest your money, commodities are a desirable place to be, although investing in precious metals can be tricky. TIPS (Treasury Inflation Protected Securities) are often touted as a sound hedge against inflation, but keep in mind that the inflation rate used is the CPI, which is horrendously underreported. Personally I think that TIPS are a terrible investment in this economy thanks to rising food and energy costs. Another possible alternative is to invest in foreign currency, but again this is tricky because holding cash means no interest, and earning interest means you need a foreign account.
If you didn’t read the article linked to above, I highly recommend you do. Being able to avoid losing money (and purchasing power) is just as important as knowing how to make money.
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