How to Prepare for Inflation – 8 Actionable Tips

By in Investing

How to Prepare for Inflation with Hard Assets, Inflation Stocks and Smart Inflation Hedging Strategies

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

According to government figures, inflation is low right now. But when you go to the supermarket, your grocery bill is trending up! What’s up with that?

Find out what causes inflation to rise, how to prepare for inflation and why you must do so now.

Unanticipated Inflation Can Cost You – Learn Why

What causes inflation?

Economists use the term inflation to describe a situation in which too much money is chasing too few goods and services. The more money the government prints, the less your dollar is worth.

The main causes of inflation are:

  • The economy is growing too quickly and there is greater demand for goods and services, than there is supply.
  • The government increases the money supply, so the dollar is worth less, due to a greater supply of money in the economy.
  • Higher wages, which increase firms costs and consumers disposable income, thereby boosting demand and driving up prices.
  • This leads to each dollar being less valuable than before and purchasing fewer goods and services than in the past.

We may find that as a result of the Corona Virus pandemic, the country will ramp up U.S. manufacturing of previously outsourced goods. This could place upward pressure on inflation as manufacturing costs are typically higher in the U.S. than in many foreign countries. Higher manufacturing costs will ultimately lead to higher prices. 

According to Lawrence H. White at econlib.org, inflation rates since 1950, as measured by the Consumer Price Index (CPI), ranged from -0.7% in 1954 to a high of 13.3% in 1979.  Although since 1991, the inflation rate has remained relatively constant, between 1.6% and 3.3% per year.

Using the latest US government CPI data from usinflationcalculator.com, an item that cost $100 in 2000 would cost $149 in 2020. And this 50% increase in cost, due to inflation occurred during a period of extremely low inflation rates.

Even low inflation rates can be a problem, over the long term. Inflation is extremely important for those living on a fixed income, like retirees.

The secret to getting rich {without winning the lottery}-click here.

The most commonly cited measure of inflation in the United states is the CPI. It’s a measure that calculates the weighted average prices of a basket of consumer goods like transportation, food, medical care, education, recreation and more.

The inflation rate in March 2020 is 1.5%, according to the Bureau of Labor statistics. Extremely low gasoline prices drove the inflation index down as did hotel and airline spending.

So, what does all this mean for you and your money, right now?

Preparing for inflation is kind of like taking out financial insurance.

Even if you experience a small amount of inflation now, inflation will increase in the future. The time to create a hedge against inflation, is now!

The Corona Virus Scare of 2020 teaches us the importance of advance preparation.

The secret to getting rich {without winning the lottery}-click here.

inflation graph 1989 to 2020

What is Your Personal Inflation Rate?

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

Inflation is personal. If you don’t drive and live in a warm climate, 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.

Unanticipated inflation occurs when the items and services that you consume most frequently increase, and your income doesn’t keep pace.

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. 

A Little Inflation Goes a Long Way

You must prepare for inflation, even though there are advantages of inflation.

Famous British economist, John Maynard Keynes, promoted moderate 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.

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

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.

So, some inflation is okay, but watch out, because the negative correlation between interest rates and inflation suggest that if low interest rates continue, in time inflation will ramp up.

How to prepare for inflation

chart source; usinflationcalculator.com

How to Prepare for Inflation – 8 Tips 

The time to hedge against inflation is before it’s here.

1. Inflation means rising prices, so stock up now on non-perishables, 

When prices are rising, stock up while they’re low.

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!

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.

Prepare for inflation with responsible borrowing.

Consider refinancing your home when interest rates are low and lock in a low fixed rate mortgage. Just beware of adding to the length of the loan. Taking out a 15 year loan can substantially reduce your total interest payments.

With increasing inflation, you’ll also end up paying off the debt with cheaper future investment dollars.

This doesn’t mean max out your credit cards, that’s rarely a good idea, especially as credit card interest rates are relatively high.

3. Inflation stocks might prosper during inflationary periods

As professionals whisper across the internet that we may be in forunanticipated inflation, consider picking inflation stocks from sectors that typically do well during inflationary times:

  • Commodities – Tangible assets have been inflation hedges in the past.
  • Real Estate – This inflation hedge will profit from both rising rent payments and appreciation as the property increases in value.
  • Hard assets – Gold, silver, platinum and other metals provide a hedge against inflation.
  • Materials Companies – The materials sector includes many types of manufacturers including steel, chemical, glass, paper, forest products, mining and more.
  • Industrial and Transportation Companies – Transportation companies include airlines, railroads, shipping, and logistics while industrial firms provide products and services for the construction and manufacturing industries.
  • Small Caps – These smaller firms are leaner and may profit from rising prices.
  • Foreign Companies – Many foreign firms are involved in the industrial and commodities sectors.

Try the Webull Investing app to buy and sell investments from your phone. 

4.The best investments during inflation include treasure protected securities, step up notes and CD ladders.

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.

Although you typically don’t receive capital appreciation by investing in TIPS and government I Bonds, treasury protected securities increase their payouts or principal based upon the rate of inflation.

That means that your purchasing power will increase along with rising inflation.

Another inflation investment to consider is the step up note. These bonds increase their dividend payments at pre-determined intervals.  

CD ladders are a great inflation hedge as well during periods of rising interest rates. Buy CDs, with varying maturities. When one CD comes due, invest the proceeds in a higher yielding CD. 

How to Handle Inflation

5. 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 during inflationary periods.

When demand for goods and services increase, companies have room to raise prices.

As long as wages and costs rise at a lower rate than prices, corporate profits will increase and subsequently, so will stock prices.

Click now to get a low cost plan to cut investment fees to the bone and manage your own investments.

6. Real estate investing is a hard asset that’s easy to invest in.

When inflation hits, real estate prices usually rise as well. The opportunities for small and large investors to invest in real estate continues to grow. There are so many ways to invest in real estate:

Diversyfund offers a range of real estate investing options. Visit their website to learn more. Diversyfund affiliate

7. 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 well.

8. 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. Your monthly Social Security check will be 24% larger at age 70 than if you began taking payments at age 67.

Conversely, if you start early, your benefit might be reduced as much as 30%.

Since your Social Security annuity is inflation protected the larger benefit that you receive at age 70 will continue to increase at the rate of inflation, throughout your life.

How to Prepare for Inflation Wrap Up

When wondering How to Prepare for Inflation, remember to start early.

Consider the impact of inflation when spending and investing.

Buy in bulk, when you can. 

Take advantage of Government inflation protected securities. 

Investing can be a sound inflation hedge. Consider adding real estate to your portfolio. Finally, stock up on staples when prices are low. During times of low inflation, its wise to prepare as unanticipated inflation may crop up when you least expect it.

New and experienced investors will appreciate the free M1 Finance investment platform. You get free stock and fund trading as well as cash management, lending and automated portfolio rebalancing. Check it out now!

*Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t believe is valuable.