How Can You Counteract the Impact of Inflation?
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” Ronald Reagan
From 2008 through 2020 inflation bounced around between -0.4% in 2009 to a high of 3.8% in 2008, during the mortgage meltdown crisis. After the 2020 Covid pandemic, with accompanying supply chain shortages, inflation surged to a millennium high of 8.0% in 2022. Despite reduced inflation of 4.1% in 2023 and the first half of 2024 clocking a 3.25% inflation rate, consumers are reeling from higher prices and reduced purchasing power.
Now is the time to learn how to prepare for inflation and how you can counteract the impact of inflation.
Find out what causes inflation to rise and how to fight inflation.
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.
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.
Data source: https://www.usinflationcalculator.com/inflation/historical-inflation-rates/
Preparing for Inflation – First Understand its Causes
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.
- Supply is reduced and there is greater demand for fewer goods, thus driving up prices.
- 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.
Simply put, inflation causes each dollar to be less valuable than before and purchase fewer goods and services than in the past.
During the recent Corona Virus pandemic, global trade was interrupted, and production for many goods and their inputs was stalled. Production slowed across the globe, as did international transportation. This caused bottlenecks in supplies and shortages of important materials and products. As supply chains withered, demand remained steady causing prices, and subsequently inflation to increase.
Despite tempered inflation pf 4.1% in 2023, this increase on top of 2022’s 5.0% surge is causing hardship for consumers, and businesses. Goods and services are more expensive, and the dollar buys less than it had in the recent past.
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, until 2021.
Using the latest US government CPI data from usinflationcalculator.com, an item that cost $100 in 1980 would cost $381.28 in mid-2024 for a 281.3% increase.
You need to learn how to prepare for inflation at home, and while shopping and traveling.
The first two decades of the 2000’s spoiled us, but now we are back to a higher inflation period. In this article you will learn how to deal with inflation and grow your money by saving and investing for the future.
Making Sense of the CPI
The Consumer Price Index or CPI is based on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’
services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected
each month in 75 urban areas across the country from about 6,000 housing units and approximately
22,000 retail establishments (department stores, supermarkets, hospitals, filling stations, and other types
of stores and service establishments).Bureau of Labor Statistics – https://www.bls.gov/news.release/pdf/cpi.pdf
The Consumer Price Index is the most common measure of inflation. It can be calculated several ways. One way includes food and energy costs, the other doesn’t. I prefer the CPI that includes food and energy, after all, we all eat and use energy! Ninety-three percent of the CPI reflects urban consumers, the other 7% reflects rural populations, military, the incarcerated, and hospitalized populations.
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
How to Combat Inflation? Understand Your Personal Inflation Rate
Before we get into how you can counteract the impact of inflation, inflation hedges and protection strategies, understand your personal inflation rate.
Inflation is personal. If you don’t drive a fuel powered vehicle and live in a warm climate, then oil prices don’t matter too much. 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.
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.
Source: https://inflationdata.com/articles/charts/annual-inflation/
How to Prepare for Inflation – 10 Tips
It’s not too late to hedge against inflation.
1. How to beat inflation when shopping.
Look for low prices on nonperishables, and stock up. Check sales and apps to find the loss leaders when shopping for things like toilet paper, paper towels, soap products, canned goods, rice, beans, peanut butter and anything that keeps for awile.
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!
Don’t forget the towels and sheets during the annual January and August sales. At the end of the season, mark downs are the greatest. And get electronics near the holidays.
2. How to combat inflation when traveling.
Air and hotel prices are high, unless you spend some time scouring the internet and travel websites for bargains. Place alerts on the air travel routes and airlines that you prefer, to be notified of price drops. Visit “less popular” locations, with lower hotel and meal rates. The shores of Lake Michigan, the Florida and Texas gulfs offer affordable vacation spots.
Get a room with a kitchen and cook some of your meals in your room.
Book vacations off-season, for cheaper rates.
Consider seeking out vacation spots within a reasonable driving distance, to counteract high airline prices.
Prepare for inflation with responsible borrowing. When rates are expected to decline, then consider an adjustable rate mortgage, so you can refinance at a lower interest rate later. Just beware of adding to the length of the loan, when refinancing.
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.
Do not take on credit card debt, regardless of the inflation level. High interest rate debt will thwart your quest to build wealth.
4. Gold might be a good inflation hedge.
Although gold doesn’t pay dividends, it is widely considered a sound store of value. From historical times, gold has been revered.
Gold is older than today’s prominent global currencies like the Euro and the US dollar. In fact, gold has preserved wealth for thousands of years. Additionally, gold is less correlated with common asset classes like stocks and bonds. Although there are periods where gold underperforms the stock markets, many like to own a percent of their assets in either gold coins, ETFs or other types of gold assets.
5. The best investments during inflation include stocks that will benefit from rising prices.
Pick 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.
6. The best investments during inflation include inflation protected government 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.
7. 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.
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8. 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:
- Real estate crowdfunding
- Buying real estate outright and either renting or fixing up and flipping
- Investing in real estate investment trusts or REITs
Groundfloor is a real estate debt company that enables investors to “be the bank” and lend to real estate investors. During high interest rate periods, you can enjoy high yields:
Diversyfund offers a range of real estate investing options. Visit their website to learn more.
9. 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.
10. Retirees wondering what to do during inflation, consider waiting to take 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.
FAQ
What is the best way to prepare for inflation?
Stock up on consumables when there are sales. Switch to lower cost substitutes when shopping for necessities, like generic brand groceries, and meat-free meals like pasta. Adjust your lifestyle to spend less. Ask your boss for a raise, as the labor shortage makes employers more likely to keep existing employees happy. Prepare mentally by realizing that high prices are usually time limited and will revert to more realistic levels, over time.
What assets do well in inflation?
Stocks in companies that can easily raise prices will do well in inflation. Gold and commodities tend to do well during inflation. Here’s an easy way to invest in Gold. Real estate also does well during inflationary times. Check out REITs and real estate crowdfunding.
How to Prepare for Inflation Wrap Up
When wondering How to Prepare for Inflation, remember to start planning 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.
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*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.
