Right now, deflation is a concern for the economy. Prices are falling and credit is restricted. However, the government is on the verge of a massive economic stimulus package, and that means that more money will be injected into the system. More money means that the value of your dollar — its purchasing power — is reduced. When we start getting flooded with dollar, it means inflation is a very real possibility.
Protecting yourself from inflation with TIPS
If you want to preserve your purchasing power, you can make investments that protect against inflation. One of those investments is in Treasury Inflation-Protected Securities (TIPS). These represent government debt (and there will be plenty of that to go around soon) that is guaranteed to keep up with the rate of rising prices. Your return is guaranteed to keep up with inflation so that your buying power isn’t eroded.
Of course, the yield is still pretty low, keeping you about even, but at least you aren’t losing anything. Another government debt vehicle that protects against inflation is the I-bond. Remember, though, that any investment carries risk. Even though government debt is considered “safe”, there is still the chance of default. If you feel like the U.S. government (and state and local governments) is likely to collapse and default on its debt, bonds are not for you.
If you are more adventurous, many people use commodities — especially gold — as hedges against inflation.
Disclaimer: I am not a financial or investment professional. Any information you get from this site is not intended as advice. It is likely to be incomplete, and it may not apply to your individual circumstance. With investment, there is always the risk of loss. Do your own research, consider your situation and/or consult a professional before making money decisions.