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Funds for Investors' Inflation-Fighting Tool Kit

TIPS aren't the only tool that investors can use to battle inflation over the long run.

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Inflation is one of the most fundamental hurdles that any investor must attempt to clear. It's not entirely clear that inflation is in the cards, in the near future at least, but it has been on investors' minds. For example, when energy and foodstuff costs surged in mid-2008, many investors became understandably nervous.

More recently, inflation worries have been replaced by fears of extreme recession and even deflation. Looking further down the road, however, the federal government's attempts to jump-start economic growth could lead to protracted inflation. Thankfully, investors have an increasingly powerful tool kit to use against the corrosive impact of inflation on purchasing power.

Treasury Inflation-Protected Securities, which provide an explicit hedge against inflation as measured by the government's consumer price index, are the fixed-income world's traditional answer to the inflation problem. That's because TIPS bonds' face values are adjusted in line with CPI, providing principal protection and increased interest payments over time in an inflationary environment. At this time, many respected mutual fund managers think TIPS are attractively valued, particularly when compared with analogous maturity nominal Treasury issues, which are offering meager yields.

Lawrence Jones does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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