Inflation Linked Investment

As of August 2005 the inflation rate (for unadjusted 12 months) is 3.6%.
Inflation is defined as a sustained rise in the general level of prices of
consumer goods and services and is measured by the non-seasonally
adjusted Consumer Price Index (CPI) for All Urban Consumers. The CPI
is a good measure of inflation as experienced by consumers in their day to
day living expenses and is often referred to as the cost-of-living index.
For getting additional information about the Consumer Price Index, visit
the website of U.S. Department of Labor .

In an inflationary environment, today’s dollar may be worth only a fraction
of a dollar next year. Inflation poses a problem for all investors, including
holders of fixed-income investments, because the effects of inflation can
erode the real value and purchasing power of coupon payments received
in the future. To illustrate, it takes $12,746 in 2004 to buy what could be
purchased for only $10,000 in 1994.

For investors who rely on the stability and predictability of fixed-income
investing, finding ways to limit or mitigate the effects of inflation are
crucial. It’s clear from the example above that investors who are saving
for some future expenditure, be it a major purchase or living expenses in
retirement, could benefit from an investment that preserved purchasing
power. Individuals already in retirement are keenly aware of the effect of
inflation on the fixed payments generated by many investments.

An investment with coupon payments linked to changes in the CPI can
help investors maintain the same standard of living even as prices rise. In
fact, any investor with a well thought out asset allocation strategy would
be wise to consider adding inflation-linked investments to their portfolio.
Such investments provide diversification benefits when combined with
equity and fixed-income investments and also help to offset the negative
effect inflation can have on other asset classes.