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How to Prepare for Inflation – 8 Actionable Tips

By in Bond, Economics, Inflation, Investing, Stocks | 24 comments

 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

    24 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

  23. Informative and well explained article about inflation. Mentioned above are list of some great actionable tips that can help everyone to prepare to deal with inflation efficiently. Thanks for sharing such an valuable article.

    clavin

    August 20, 2018

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