Some banks are offering interest of 2% or more -- not much, but better than the next-to-nothing returns of T-bills.
"It lets you keep your powder dry while you wait for a better environment," Barrington said, "and you can earn a little bit of interest in the meantime."
Still, any "cash" investment such as T-bills, bank accounts and money market mutual funds exposes you to a loss of purchasing power as prices rise.
A much stronger hedge against inflation: Treasury Inflation Protected Securities. These bonds, known as TIPS, pay a fixed interest rate just like standard Treasuries do. What makes TIPS different is that the government adjusts their principal in tandem with consumer prices. Thus your regular interest payments will rise along with the cost of living.
The increased principal is real: You get the whole amount when the bonds mature. And TIPS investors are protected somewhat in the event of deflation as well: The value of the principal can't drop below the original face amount.
Despite more inflation talk in recent months, there was no rush into TIPS in the second quarter. Mutual funds that invest in inflation-protected bonds gained on average only 1% in the period, after surging 4.2% in the first quarter, according to Morningstar Inc.
--
Hard assets
During inflationary periods, many investors turn to commodities such as oil, copper and grain because their value tends to rise along with consumer prices.
If rocketing energy prices are driving up the cost of living, having an investment in that industry can help offset those higher prices. Ditto with supermarket prices and agricultural commodities. Such focused investing is easy enough to do thanks to low-cost exchange-traded funds and other mutual funds that specialize in specific commodities.
But be aware that commodities can stagnate. Consider gold, for example. The precious metal tends to get bid up sharply when investors fear inflation. By the time you get in, the price gains may be all but over.
"Gold is already up 220% this decade," Barrington said. "Just how much inflation do people think we're going to get?"
And because commodities themselves don't have earnings or pay interest, they can be dead money for a long time once inflation cools. Gold, for instance, began an extended slump after peaking in 1979-80, and its price didn't revisit that level for more than a quarter of a century. If you can't resist gold, think about investing in companies that mine it and thus have an earnings stream that can cause their stock prices to appreciate.
