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Combating inflation
Rising prices for everyday items means your dollar is buying less. Here's how to stretch it a little further.
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| For more information on managing your largest investment, check out Gerri Willis' "Home Rich," now in bookstores. |
NEW YORK (CNNMoney.com) -- Record-high gas prices and the surging cost of food is just the beginning. Here are some top tips on how you can take the bite out of inflation.
Put very simply, inflation is when you pay more for the things you buy. And you know you're getting hit with inflation when you drive or go shopping. Let's take a look at what prices have done over the past year. Over the past 12 months, flour is up 37%, eggs are up 35%, milk is up 23% and bread is up 16%.
Now, remember, there will always be some inflation in the economy. To find out exactly how much more you're paying, check out the Bureau of Labor Statistics at www.bls.gov and look under "Consumer Price Index." The historical long-term rate is 3.2% says economist Hugh Johnson of Illington Advisors. And don't forget, in the 70s and 80s, inflation was in the double digits.
Inflation hits just about anything you can think of: your telephone bill, your utility bill, clothes, shoes. The cost of energy, gas and electricity is going up and that's causing a domino effect. Companies are paying more to ship their goods to stores, and the cost of raw materials is also rising. And that cost is getting passed to you.
Medical costs are also hard hit by inflation. It's more expensive to produce medical equipment like MRI machines. Pharmaceutical companies are finding it more expensive to produce drugs. And don't forget about the cost of heating and lighting the hospital.
One thing you may think is insulated by inflation is your nest egg. But keep in mind, every dollar you save loses value over time. During times of inflation, you need more money to combat rising prices. Stocks tend to do better than bonds in times of inflation says Johnson.
So, even if you're already retired, it makes sense to keep some of your portfolio in stocks. If you are approaching retirement, and you want more bonds in your portfolio, you may think about investing in TIPS. These are Treasury Inflation-Protected Securities. Principal and interest payments increase when inflation increases. You can buy TIPS through a bank or broker at treasurydirect.gov or you can also buy mutual funds that invest in TIPS. 
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