Feeling the Squeeze?

4) Lock in Your Loans at Fixed Rates
It's still a good time to lock in a fixed-rate mortgage. If you're carrying a balance on a home equity line, consider switching it to a fixed-rate second mortgage to limit your exposure to rising rates. Between 1972 and 1980 short-term rates rose from 4 percent to 16 percent. "The coming interest rate increases may need to be faster and bigger," suggests Bud Conrad, chief economist of Casey Research, a company that specializes in commodities. If you have a variable-rate mortgage and expect to stay in your home longer than three to five years, strongly consider refinancing to a fixed-rate loan. If you already have a mortgage that is costing you 6 percent or less in interest, don't be in a hurry to pay it off fast. It's a cheap loan.

5) Stop Lending at Low Fixed Rates
For the same reason that you want a low-rate fixed mortgage if rates rise, you don't want to have a lot of money in long-term bonds. If rates rise by 1 percentage point, your 20-year Treasury bond would be worth 10 percent less immediately. Keep the bond part of your portfolio in shorter-term bonds and bond funds, suggests Harold Evensky, a Coral Gables, Fla., financial adviser.

6) Continue to Buy Stocks
They usually do well during periods of moderate inflation, according to Morningstar, the Chicago research firm. Focus on blue chips that are cash-rich and healthy and produce necessary products, so they have room to raise prices when their costs go up, says analyst Chris Davis. Invest some of your money in the companies that do well when inflation spikes. Oil companies make more money when oil gets expensive, because they mark it up on a percentage basis. The same can be expected of companies that produce food, metal, paper, gas and other commodities. You can find them all in natural resources mutual funds, like the T. Rowe Price New Era Fund favored by Bohemia, N.Y., financial planner Ron Rogé.

7) Buy TIPS, Carefully and Sparingly
Treasury inflation-protected securities have built-in guarantees that the principal you invest in them will keep pace with inflation, but their yields right now, at 1 percent, are quite low. Accepting a low yield like that is a sacrifice that might be worth making for "insurance" against inflation, says Evensky. "If we buy them and they're not that attractive, the yield is not that high, we'll get a lousy return with a small part of the portfolio," he says. "But if inflation spikes and we don't have that kind of hedge, it could be catastrophic." You can buy TIPS through a fund, such as the Vanguard Inflation-Protected Securities Fund (VIPSX) or the Fidelity Inflation-Protected Bond Fund (FINPX). They are best held in tax-advantaged retirement accounts, because of the way they produce taxable income. Foreign inflation-protected bonds have been offering bigger returns that U.S. TIPS. You can get them through a new exchange-traded fund, SPDR DB International Government Inflation-Protected Bond ETF (WIP). Better returns and the same inflation guarantees can also be found through corporate inflation-protected bonds. Some are sold at http://www.incapital.com.

8) Change Your Behavior
Think public transportation, smaller car, walking more often. Eat cheaper, too: have a nonmeat night, popcorn (the old fashioned way, on the stove) instead of buying chips, and consider growing some of your own food. Even a tomato plant in a patio pot will give you better flavor, some grocery savings, and fewer salmonella worries.

9) Don't Go Overboard
Protecting yourself against inflation is smart, but remember that the Fed is also taking on that challenge. The result could end up being a slower economy instead of an overheated one. In that case, you wouldn't want all of your money in oil stocks and gold. But you'd still be able to use the toilet paper you squirreled away.

© 2008