Here’s the second in our ongoing series examining the current economic climate and how it may affect women over 40. In this post, Catherine D. Wood disputes the notion that inflation is not something we need to factor into our long-term financial planning. –Ed.

Inflation is dead, according to financial pundits in the papers and on TV. The Federal Reserve has kept interest rates near zero to stimulate the economy. Mortgage rates are at all-time lows. Most people find that they can get discounts on everything from clothing to cars, which means that most of these items are priced below where they were at the beginning of the recession.

The recession and low interest rates mean that many of the traditional ways that people created wealth are now gone. For most homeowners today, the odds are low that they can sell their houses for big profits to fund things like retirement or the education of their children. And stocks, although up recently, are for the most part below their pre-recession levels. The Dow Jones Industrial Average is at 11,000, well below the 14,000 level where it traded two years ago.

However, some economists believe that inflation—and perhaps rapid inflation—is just around the corner. If this is true, the best ways for people to invest will change considerably, perhaps in a short period of time.

Unquestionably, exceedingly low interest rates offer people and businesses an opportunity to buy assets that they might otherwise not be able to afford. Any increase in confidence from today’s low levels should spur such activity. In fact, it wouldn’t take much of a jump in consumer and business confidence to encourage people to start borrowing money, perhaps aggressively, at low interest rates in order to invest and consume. In turn, rapidly increasing demand for goods and services could cause price spikes…and, longer term, the possibility of bubbles like the one we saw in real estate from 2000 to 2006.

Signs abound that inflation is already surfacing in the U.S. and the global economy. Prices of key commodities like oil and corn have risen quickly. Oil prices have gone up roughly 10 percent in less than three months, corn 60 percent. In the face of supply constraints, demand for fuel and food from China and other developing nations could easily cause the price of crude to rise above $100 per barrel from roughly $80 today. Such a price increase would translate into higher prices for gas and petrochemical products, many of which are used in everyday life. Likewise, as the price of agricultural products rises, so should the price of food.

In other words, inflation could rise unexpectedly.

What should people in mid-life do if they believe that the purchasing power of a dollar is going to fall due to inflation? This question is particularly acute for women, who live almost a decade longer on average than do men in the U.S., and need retirement plans that take their longevity into account.

For people facing retirement in the next two decades, some of the best hedges against inflation to consider are finite assets like gold and real estate. Many analysts argue that gold has already risen so high that it cannot move up any further. But in an inflationary environment, the gold price could go much higher, as it did during the period of rapid price increases forty years ago.

Real estate may be a much more realistic purchase for most people. Many residential real estate and land values in the U.S. have fallen to where they were a decade ago. Mortgage rates are very affordable, particularly for those with reasonably good credit ratings. And land is a finite asset. As general prices in the economy rise, land prices should appreciate considerably as well. Real estate may seem like a risky investment in the aftermath of a financial crisis triggered by subprime mortgages. However, during a period of inflation, real estate would be one of the prime hedges against, and beneficiaries of, inflation. Bonds and other sources of “fixed” income would be one of the biggest victims.

It is always worth considering the options that those over forty have for building their net worth. Many who invested in stocks during the past decade have lost a considerable portion of their nest eggs. If inflation returns, financial assets chosen for their presumed safety today, such as bonds and treasuries, may not turn out to be the right choice for the next ten years.

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  • Kathy Rogers November 1, 2010 at 11:26 am

    Catherine, you explain clearly and thoughtfully why inflation poses a more immediate risk than government officials currently acknowledge, and, even more importantly, what we should do about it.