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The official rate of inflation as given by the Consumer Price Index, is often overstated, yet it should not be ignored.

Protection against inflation

Some people say that inflation hurts bond holders more than stockholders, because in stocks, inflation would be offset by advances in dividend and an increase in stock price. However, inflation does not have a predictable relation with earnings and stock prices. A little inflation may be helpful for business profits, but not enough to seriously influence earning power. Other factors, such as wage rate, and the amount of new capital needed may be more important.

When people are afraid of inflation, they buy gold. However, in the long run, the price of gold does not increase much, and gold does not give you any dividend.

Many people think that Real Estate protects against inflation, but real estate price fluctuates, selecting which real estate to buy requires skill, and diversification is difficult to achieve.

The best protection against inflation is to diversify by investing in both stocks and bonds. Bonds are less risky and protect against large scale inflation.

Stocks generally outpace inflation, but not always. Two more things that can help you:

- REIT Real Estate Investment Trusts, companies that own and collect rent from real estate.

- TIPS Treasury inflation protected securities (US government bonds thatgo up in value when inflation rises). Buy at Treasury direct