How to Prepare for Inflation – 8 Actionable Tips

By in Bond, Economics, Inflation, Investing, Stocks

 Prepare for Inflation – It’s Here

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

Inflation is here, and it’s increasing.

I know you’ve noticed inflation.

Gas and food prices are up. With new tariffs, you can expect other prices to rise too.

I’ve lived through really high – double digit – inflation.

And there are tips and strategies to cope with and prepare for high inflation.

How to prepare for inflation starts with acknowledging its existence.

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. 2016 and 2017 saw inflation up to approximately 2%. Now, in mid-2018, we’re almost at 3% inflation.

Look, 3% inflation isn’t all bad. The economy is growing well, employment is strong and the new tax reform is helping consumers and businesses. To top it off, Americans are also saving more.

Don’t panic, a moderate amount of inflation isn’t horrible.

How to prepare for inflation

chart source; usinflationcalculator.com

You must prepare for inflation, even though it can be good.

Famous British economist, John Maynard Keynes, promoted some inflation to prevent the “paradox of thrift.” If prices fall too much, because the country is becoming too productive, then consumers will slow spending, expecting that if they wait, they’ll snare a better deal. This leads to lower demand, production, layoffs and a declining economy.

Also, with inflation, debtors benefit as they’re repaying loans with money that’s worth less than the dollars that they borrowed. Inflation also helps the Federal Reserve repay it’s massive debt with cheaper dollars.

And who doesn’t like wage inflation, when your salary increases? As long as it’s rising more quickly than your costs are growing, you’re in good shape.

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To Cope With Inflation – Understand it

What’s Your Inflation Rate?

Before we get into inflation protection strategies, understand your personal inflation rate. 

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 the services that you use, will directly influence your own personal inflation rate. 

How to Cope with Rising Inflation? Outsmart it and prepare for inflation

How to Prepare for Inflation – 8 Tips 

As inflation begins to creep upwards, now is the time to put on your inflation-fighting hat and get ahead of 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 times with increasing inflation, buying large quantities on sale was a true inflation hedge!

1. Inflation means rising prices. So, if you can get a good deal on non-perishables, stock up! When prices are rising, stock up while they’re low.

Grab the loss leaders (the items that store’s price at cost to lure you in).

Use discipline and stock up only on those super cheap items.

Don’t forget the towels and sheets during the annual January white sale.

At the end of the season, mark downs are the greatest.

2. 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.

3. 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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4. Consider investing in real estate. When inflation hits, real estate prices usually rise as well.

5. Take a look at commodity funds. 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.

6. When investing in bond funds, keep maturities short. That way, as interest rates rise, the bond dividend payments will be reinvested at higher higher yields.

7. For those facing retirement, consider delaying taking your Social Security pension. If you can hold off until age 70, you’ll lock in your largest monthly benefit.

And, your Social Security annuity is inflation protected.

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

When spending and investing, consider the impact of inflation. Buy in bulk, when you can. And enjoy the higher rates that you’ll earn on your cash in bank CDs and money market funds.

How are you coping with inflation?

Updated; July 28, 2018