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How to Prepare for the Coming Inflation

By in Bond, Economics, Inflation, Investing, Stocks | 23 comments

 When is Inflation Coming? 

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” Ronald Reagan

It’s been more than 6 years since I wrote this original article, and inflation is just recently beginning to pick up.

Inflation still hasn’t topped two percent. Is it possible that inflation will remain low indefinitely? 

Or does it mean that I stink at predicting the future?

Likely, I am not great at predicting the future. Yet, one of the reasons for the low recent inflation rates is vanishing. Inflation rates are correlated with economic growth, and up until recently, the economy was growing very slowly. Currently, economic growth is picking up-and along with it-inflation.

In fact, last night my husband and I were listening to the news and pondering our future. My spouse asked me what would happen if the deficit grew and the economy picked up and I suggested that inflation would likely increase. Then in the annoying way that I’m apt to pontificate, I talked about the following…

In 2012 through 2015 the inflation rate was 1.7%, 1.5% 0.8% and 0.7% respectively, according to the U.S. Inflation Calculator. And it appears that we’ve turned an inflation corner with a 1.7% inflation rate in 2016. Although, the 2016 inflation rate is still below the Federal Reserve Bank’s target inflation rate of 2.0%, we’re getting closer. Additionally, with the growing economy plus Donald Trump’s promise for further economic growth and additional infrastructure projects it’s likely that inflation will continue upwards. 

In fact, if Trump’s tax cuts go through congress and his infrastructure plans materialize, it’s likely the national debt will also grow, supporting a case for higher inflation

That’s when my husband asked the question, “How do you prepare for inflation?”

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What’s Your Inflation Rate?

Before we get into inflation protection strategies, understand your personal inflation rate. In spite of the likely future increases in inflation, the published inflation rates only go so far. 

Inflation is personal. If you don’t drive, then the oil prices don’t matter. If you are single and don’t eat much, then food prices aren’t a big deal. Whereas if you live in NYC, don’t drive and have 4 teenagers, then rent and food inflation will be steep. 

Although the published inflation rates are informative, they don’t always apply to your situation. Annual inflation rates are calculated with 12-month data of the Bureau of Labor Statistics Consumer Price Index (CPI).

The CPI covers goods and services from these categories:

  • Food and beverages
  • Housing
  • Apparel
  • Transportation
  • Medical care
  • Recreation
  • Education and Communication 
  • Other

Ultimately, if you are over age 50, own your own home, aren’t paying for education and have low medical expenses, then you will be less impacted by inflation than someone who consumes from more of the CPI categories.

So, take the published inflation rates with a grain of salt. What you buy and services that you use, will directly influence your own personal inflation rate. 

Quick Inflation History Lesson 

For those of you in your 20’s and 30’s, you have been fortunate to live in a time with relatively low inflation. This low inflation is unlikely to continue and the consequences for high inflation are great!

Before I continue, let me reiterate that no one can predict the future, in spite of the pundits online and on tv attempting to do so. 

According to Tradingeconomics.com, the money supply is increasing. That said, as any student of Economics 101 understands, when the money supply goes up there is more money chasing the same supply of goods and prices will eventually rise. The dollar will be worth less and it will require more dollars to purchase the same amount of stuff!

When the U.S. road building and bridge fixing come to pass, and if taxes are also cut, the only way to fund the government spending will be by increasing the national debt. There’s some who believe that greater debt levels will ultimately also lead to higher inflation rates. 

Before we get too hyped up about potential inflation implications, it’s useful to understand that moderate inflation levels up to 3% are expected and may actually be helpful for the overall economy.

How to prepare for #inflation. The best time to prepare for the future is now!

Take a walk down inflation memory lane and look at the charts and data above. Notice the inflation rates from 1975 to 1986 ranged from 2% in 1986 on up to 13.58% in 1980 and a cumulative 110.36% for the ten year period. In 1986, it took about $2.00 to buy what $1.00 would get you in 1975.

Now, check out ‘Inflation Impact During 2 Ten Year Periods’ and compare  the inflation rates from 1975 to 1986 with those of the recent 2005 to 2015 time period.  The cumulative inflation rate from 2005 to 2015 is a paltry 20.90%.

The recent inflation rates are quite different than those of the past!

If you bought a $50 item in 2005, factoring in the rise in inflation, that item would cost about $60.45 in 2015. And many  goods such as Asian imports and electronics continue to decline in price due to greater globalization.  

Although you may not be thinking much about inflation now, you should be. It’s unlikely that inflation rates will remain this low going forward.

Here’s how to be proactive and prepare for inflation

How to Prepare for Inflation

If you start thinking about inflation now, before it is a reality, you’ll be better situated to handle it. 

When I was a little girl, my mom bought huge amounts of toilet paper, canned goods, and other non-perishable items on sale and stored them in the basement. Although it was annoying to hunt down a roll of toilet paper in the basement; now I totally get it. During those times, with increasing inflation, buying large quantities on sale was a true inflation hedge! If you know prices are rising, it’s a good idea to stock up while they’re low.

Recently, many individuals wait for items to drop further in price before purchasing. With high inflation, don’t wait to buy an item. If the price is good, stock up.    

If you’re thinking of buying a home or a car, you’re better off taking on the debt when rates are lower, rather than waiting until they rise along with inflation. (Of course, make sure the purchase price is appropriate for your situation and within your budget.) With increasing inflation, you’ll also end up paying off the debt with cheaper future investment dollars.

Keep investing in the stock market, regardless of the economic scenario. If history is any guide, the longer your money remains invested, the greater average annual returns you can expect from your stock and bond investments. Keep your investing plan in place.

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In his Forbes.com article, “7 Ways to Beat Inflation”, William Baldwin suggests investing in companies that “…dig stuff out of the ground. The T. Rowe Price New Era Fund has delivered handsome returns over the past decade by owning resource sector companies like Schlumberger, Cameron International and Freeport-McMoran Copper & Gold. This fund charges a fee of 0.67% of assets annually.”

You may want to look at precious metals and energy ETFs as an inflation hedge. An added bonus is that the oil funds  are priced below their prior lofty levels.

For those facing retirement, think about delaying taking your Social Security pension. You’ll get a juicier check and the annuity is inflation protected.

Look at Government inflation protected bonds such as TIPS and I bonds. Those government offerings are a great tool for protecting your capital against inflation.

It’s not to early to start thinking about how to prepare for inflation. If you set up your lifestyle and investing to withstand an increase in the inflation rate, your long term wealth will be better protected.

What are your thoughts on how to prepare for inflation?

A version of this article was previously published.

 

    23 Comments

  1. Instead of stocking up on commodity items, how about we think bigger? What do you think about acquiring more rental properties? If inflation is going to blow up, we might as well leverage as much as we can right now. Is that a good way to hedge against inflation? Over the long run, rental income will go up with inflation while mortgages stay the same.

    retirebyforty

    December 1, 2010

  2. @Retire-Are you reading my mind? You are absolutely correct. If you have met your basic financial needs, have a 6 month savings cushion, then buying assets on sale (for appreciating assets) like financing and real estate is a wonderful idea!

    Barb

    December 1, 2010

  3. I’m going to come off as sounding evil here, but I want interest rates to sky-rocket. One of my dad’s friends sold the family farm in 1980 or so and invested it in T-bills or something similar (and safe) at 18%. That’s my fondest dream – safe and high.

    Jacq @ SMRM

    December 1, 2010

  4. Jacq-So much depends on whether you are a borrower (mortgage, car, credit card debt) or lender (think CDs and bonds). Lenders would appreciate some higher rates! I just received the last coupon (interest) payment on a 20+ year bond paying 12% interest from the 1980’s! There are pros and cons to every economic scenario.

    Barb

    December 1, 2010

  5. Oh I’ll be a lender. 🙂

    Jacq @ SMRM

    December 1, 2010

  6. No mention of gold or real estate? 😛

    Since you Americans can get 30 year fixed mortgages… a nice rental property could look pretty attractive.

    Kevin@InvestItWisely

    December 1, 2010

  7. Hi Kevin, Gold is way too expensive now with more downside than up. As Retirebyforty suggested, Real estate is on sale now, so if you have the resources, now is a good time to get into the market! In fact, I’m glad you mentioned it Kevin, for those with their other financial needs under control, this is a sweet time to venture into a rental property. (Beware, managment is time consuming and requires a nice cash cushion for those unexpected expenses)

    Barb

    December 2, 2010

  8. Mark-Great suggestion. TIPS and I Bonds were designed as inflation hedges. I recommend buying individual TIPS and I Bonds and dollar cost averaging (spreading your purcases over time). Thank you for bringing these investments up!

    Barb

    December 2, 2010

  9. Great suggestions!
    My thing is buying stamps (that don’t have the prices on them) and bus tickets lol.

    youngandthrifty

    December 2, 2010

  10. I wish I had the money for real estate right now, because that is exactly where I would be headed.

    We already stock up on staples, just because I love to take advantage of sales. However, that was a great tip you gave about bonds.

    Everyday Tips

    December 2, 2010

  11. Well, all commodities have shot up, not just gold. 😉
    What do you think about “black gold” ?

    Invest It Wisely

    December 2, 2010

  12. @Mark-TIPS and I Bonds are a good suggestion. Although I would not put all of your cash in them right now, but dollar cost average into them. (Buy TIPs or I Bonds at regular intervals)

    Barb

    December 2, 2010

  13. As for as household items, we have managed to fill 4 large bins full of various items that we got for next to nothing shopping at CVS (and a little from Walgreens)! Since we are in debt, we haven’t done much with our investments, yet. But I plan to look at them in the next few weeks!

    Unfortunately, the price of many commodities have gone up. This means that investors must be willing to perform a lot of research and not just buy off of basic suggestions or historical patterns.

    Khaleef @ KNS Financial

    December 9, 2010

  14. @Kevin-Are you referring to “black gold” ie oil (like in the Beverly Hillbillies)? I have made a decision not to worry about having a commodities allocation in either the portfolio I professionally manage or our personal one. I believe with enough diversification across a variety of asset classes, investing in commodities is unnecessary.
    @Khaleef-Your CVS foray’s are always impressive :). As I’m sure you know, best use of your cash is just paying off the non mortgage dept as quickly as possible!

    Barb

    December 10, 2010

  15. very cool site. Filled me with a even better comprehension this country’s economy. Thanks a lot buddy

    milfs in stockings - milf mingle

    January 21, 2011

  16. This is an excellent post and thanks for sharing. With rising inflation levels another anti-inflationary strategy would be to stock up on commodities themselves, in addition to commodity items as mentioned in your post, im talking silver, rice etc; all of the things that tend to do excellently in an inflationery environment. The two mentioned still remain depressed in terms of price, so still a lot of money to be made 🙂

    Alex Young

    February 6, 2011

  17. Real estate is a safe bet – but you will need to be patient and it does take work on some continual basis. I prefer diversification in the stock market…. it is easier and if you do the math it’s probably a better return.

    frosty

    October 7, 2012

  18. @Alex, Inflation is certain to come, the only question is when.
    @Frosty-Real estate is definitely a lot of work, there is no such thing as passive income. All income generation requires work. Only time will tell which returns outperform. It would be nice to have a look into the future.

    Barb

    October 8, 2012

  19. When inflation will come and interest rates will go up there will not be too many people who will want to pay high interest rates on mortgage and real estate prices will go down.
    Pay off all of your loans, fix everything around house set aside some money, buy gold coins and wait. Government will punish savers.
    Good luck.

    Arthur

    October 19, 2012

  20. Hi Barb.
    Inflation will come in next 2-3 years.

    Arthur

    October 19, 2012

  21. @Arthur, I agree that it’ll be hear sometime in the foreseeable future.

    Barb

    October 19, 2012

  22. Great article. I think I’m pretty well positioned for inflation.

    Thinking ahead – When inflation hits, at what point do you start buying bonds? And what’s the best way to invest in bonds? By them out right in retirement accounts? Or bond fund?

    Ken Ashe

    January 12, 2017

    • Hi Ken, As I’m not a financial planner I can’t tell you what’s right for your personal situation. Here’s what I do; I buy the maximum amount of I bonds allowed by law every year. I have bought individual TIPS in the past. This year, I haven’t yet decided whether I’ll continue to buy individual TIPs of invest in a TIP ETF. I don’t think it makes a huge difference whether you buy individual TIPs or a fund. thanks for writing in. How is your portfolio allocated?

      Barbara Friedberg

      January 12, 2017

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