During much of the bull market of the 1990s, inflation has been viewed as a vampire safely stuck away in his coffin, out of sight and often out of mind. Yet he may be making an appearance once again, striking fear into the hearts of investors and that inflation watchdog, the Federal Reserve.

Americans typically hear about inflation through the publication of the consumer price index (CPI). This is a measure taken by the U.S. Bureau of Labor Statistics of the average change in prices paid by consumers for a fixed market basket of goods and services. The basket includes food, housing, clothes, transportation, medical care, and so on. The measure is taken monthly and then annualized. Through May of this year, the CPI had risen 3.1 percent over the previous 12 months. For the first five months of 2000, the CPI climbed at a rate that projected to the end of the year would be 3.6 percent. Although that's well below the rough double-digit inflation of the 1970s, the CPI is nonetheless on the rise by recent standards. From a 6.1 percent rate in 1990, it fell to 1.6 percent in 1998, before jumping to 2.7 in 1999. Consumers have felt direct evidence of this rise in such things as gas prices, and in some sectors of the country, housing costs.

The impact of the CPI numbers is widespread. Social Security uses it to adjust benefit payments to retirees, it's a bargaining chip in wage negotiations and the Federal Reserve uses it as an indicator in deciding whether to raise or lower interest rates. The Federal Reserve has raised interest rates lately in no small part because of the rising CPI, and those higher interest rates ripple through the economy affecting mortgage and credit card rates, and eventually slowing job growth.

But the CPI numbers also can be somewhat misleading to individual consumers. Keep in mind that the CPI you hear about reflects an average national basket of goods for the urban consumer. On the other hand, your personal rate of inflation may be quite different, depending on your personal basket of goods. For example, tuition for college has risen much faster than the CPI in recent years, hitting hard families trying to put kids through school but not hurting other families. The same goes for medical expenses, which tend to hit the elderly harder. Housing costs have skyrocketed in some areas, pricing some families out of the market, but not in other areas. (For regional CPIs and examples of how to
estimate your personal inflation rate, go to the Bureau of Labor Statistics Web site for the CPI (http://www.bls.gov/cpihome.htm).

Inflation is not expected to return to its double-digit rate of the 1970s. Globalization of the economy and efficiencies wrought by computers are expected to help keep inflation down. Nonetheless, even a seemingly low inflation rate can hit consumers hard over time. It is a silent thief: It robs you and you don't even know it. Stuff $1,000 under a mattress and at three percent inflation that $1,000 will buy only $744 worth of goods 10 years from now, and only $554 in goods in 20 years. How do you keep your personal inflation in check? Here are a few tips.

Plan for it. When calculating your retirement needs, for example, be sure your savings and investing strategies take inflation into account. Many financial planners use a three to four percent annual rate.

Try to cut back expenses in your higher inflation areas. This might be easier to do with college tuition and housing costs, for example (go to a less expensive school, buy a less expensive home), than for something like medical expenses or groceries. Cutting back expenses is especially critical for retirees who won't be able to compensate for inflation through higher wages.

Review your investments. A well-diversified portfolio should go a long way toward helping you through inflationary times. You might want to look at moving some of your Treasury securities into the new inflation-indexed government bonds. Stick with shorter-term bonds or shorter-term bond mutual funds to minimize fluctuations in principal. Rising interest rates usually accompany rising inflation, and rising interest rates hurt long-term bonds more than shorter-term bonds. Also look at real estate investment trusts (REITs), because real estate tends to hedge inflation well. And don't give up on stocks. Stock markets don't like high inflation and high interest rates, but stocks still are the best long-term hedge against inflation.

This article was produced by the Consumer Affairs Dept. of The Financial Planning Association and provided to you courtesy of Nigel B. Taylor, CFP, Santa Monica, California. If you have any questions or concerns regarding this, or any other financial topic and are a resident of Southern California, please call me at 1-800-444-2237 (California residents only please), or click on the "MORE INFO" button to arrange for a free initial consultation in the comfort of your home or office.