Getting a handle on stagflation
Here are some top tips on how to protect yourself in a period where a slowdown of the economy is coupled with high inflation.
NEW YORK (CNNMoney.com) -- Sure, inflation is scary, but the real boogeyman in the economy is stagflation. Here's the lowdown.
It's a combination of a slowdown in the economy and high inflation. For consumers, that can be worse than a short recession. The reason? A short recession may kill your job prospects but at least you're not facing higher prices.
During a period of stagflation, you're unlikely to make major wage gains, but you'll be squeezed by high prices and you still may lose your job. Worse, the last period of stagflation lasted from the late 60s to the early 80s, according to Stanford economist Michael Boskin. At that time, inflation was in the double digits and the unemployment rate was above 10.8%. It took a big recession to squeeze the inflation out of the economy.
The stagflation we're seeing now is likely to get worse before it gets better, but economists don't think it will get as bad as it did in the 70s. "It's stagflation-light so far," says Hugh Johnson of Johnson Illington Advisors. Right now, inflation is at 5%, unemployment rate is 5.5% - all far lower than the highs of the 1970s.
You may be tempted to pull your money out of the stock market during times of stagflation. But that is a mistake. This market will turn around at some time. And the first sign that the economy is getting healthier is that the stock market makes gains. It's a forward indicator. Timing that turn is impossible - you're better off buying stocks at a discount and riding the upturn.
You also may consider putting some of your portfolio into Treasury Investment Protected Securities - or TIPS. These investments rise during times of inflation. If someone buys $100,000 in TIPS and inflation increases by 3%, the TIPS principal will be worth $103,000 by the end of the year. TIPS also pay interest twice a year, at a fixed rate. You can buy TIPS through a brokerage or directly through the government at treasurydirect.gov.
It's going to be hard to find a good place to put your money anywhere in this kind of environment. Make sure you have as much cash reserves as possible, especially now. The highest-yielding bank money market deposit accounts and savings accounts may give you a chance for some returns.
For information on where to find high rates, check out bankrate.com. If you're looking for safer areas in the stock market, you may consider consumer staples...those are businesses that sell products no matter what the environment is like, says Alec Young an Equity Strategist at S&P Equity Research. So, that would be companies like Procter & Gamble, Wal-Mart and Costco.
That being said, in this market, you don't want to invest blindly. Make sure you do your homework.