During times of inflation, the value of a dollar today is worth more than one in the future. Tuesday is a bit soon, but it illustrates the point. Conversely, when there is deflation the value of something might be less in the future. When that is the case, people will wait before purchasing. That is why deflation is so vilified.In the US, there were eight months of declining prices in 2009. Consumer purchases stopped dead in the water. A modicum of inflation is viewed as a good thing in economic circles. It can provide the wind to get things moving again. The challenge is not to have too much of a good thing.The widely accepted inflation ‘target rate’ is two percent for smooth economic sailing and four percent is the upper limit. In the US the rate is used as a lighthouse, in the UK and Europe in is treated more as an anchor. Inflation in the US as measured by the consumer price index (CPI) had been on a run. The average historic US inflation from 1914 through 2010 was 3.38 percent.The most recent measure was released yesterday by the Bureau of Labor Statistics (BLS). From April 2010 to April 2011, the All Items index rose 3.2 percent. The reported CPI for April was 0.4 or 4.8 percent on an annualised basis. This was down from the six percent annualised rate in February and March. Based on the CPI for four months reported so far this year, the annualized rate was 5.4 percent.There are also several other measures worth considering including the PPI, and the IPP. Released by the BSL on Thursday, the PPI or Producer Price Index reported a 6.8 percent annualised spike in finished goods. This was largely driven by food and gas increases.There is a ‘core’ PPI, which excludes the volatile food and oil component. This Core CPI gained 2.1 percent over the 12 months through April 2011. Both measures exceeded analyst expectations. The increases in prices for producers eventually flow through to impact consumer prices. There was a sharp 9.4 percent annualised jump in April for intermediate goods, suggesting more retail price increases are yet to come.The IPP or International Price Programme has an Import/Export Price Index reported as MXP. It measures the change in prices of goods and services traded with the US, excluding military items. The report for April was released on Wednesday as well. The April index of import prices for All Commodities had risen an annualized 11 percent, with meat and vegetables up 27 percent and 25 percent. This is beginning to bite. However, much of the food imported to Bermuda is produced in the US where food price increases have been less severe.All of the above listed measures are released by the BLS and are based on surveys of reported purchase using a base index of specific items. For the CPI, the items are selected to represent a typical basket of goods and services. There is much debate on how representative is this basket in terms of consumer spending.Changes in methodology have raised questions about the historic comparisons of the indexed figures. The impact of such changes can have wide-reaching ramifications on the economy, by affecting the Federal Reserve base rate to changes in salary based on the CPI index.Some suggest changes implemented in 1980 during a time of double-digit inflation have acted to reduce the reported rate going forward. In the 1990s, there were modifications to better include the change in buying habits such as cell phones and computers. The latter is referred to ‘hedonic’ adjustments or hedonic index components. As defined by Dictonary.com, it is an adjective characterising or pertaining to pleasure, the root for the term hedonism. Now there is Wimpy for you. However, the reality of it is less amusing. This is especially true for the financial markets.An increase in inflation reduces the ’real rate’ that investors receive after deducting the effects of inflation from the stated rate. Likewise, it reduces the purchasing power of a dollar in the future. In the face of a rising inflation rate, the central banks such as the US Federal Reserve act to increase its benchmark rate. This in turn will tend to depress equity and bond valuations.The impact on stocks will be more noticeable in the smaller capitalised companies, as fast adjusting bank-loan rates are a greater source of their borrowing. Rate increases also affect larger companies that issue or roll-over existing debt, as the required interest rate climbs. What is an investor to do?There are a couple of options. Treasury Inflation Protection Securities (TIPS) are designed to rise with the inflation rate. It is important to note they do not respond well to rising interest rates without associated increases in inflation. We will address TIPS more fully next week.For stocks, careful consideration should be given to the industry sector. Some will be less sensitive to interest changes whilst benefiting from a growing economy. Unfortunately, the economy is still stuttering and not yet under full sails. A scenario of rising inflation and a stalled economy is ‘stagflation’ and would truly be the doldrums.There are many traditional approaches to investing in inflationary times. Next week the focus will be on TIPS.Patrice Horner holds an MBA in Finance, a FINRA Series 7 Licence, and is a Certified Financial Planner (CFP-US). Any opinions expressed in this article are not specific recommendations, nor endorsements of any products. Individuals should consult with their banker, insurance agent, lawyer, accountant, or a financial planner for advice to address their personal situations.