We are seeing it every time we go shopping. The prices for meat, poultry and basic foodstuffs have been increasing at a rapid rate. The same can be said for home prices, used car prices, the cost of energy and, if you are in business, the cost of worldwide shipping. The key question we all want answered is whether these increases will continue? For what I am seeing in my life, these price increases are exceeding the increase in my income. For many adults, this is the first time they are experiencing the impacts of inflation. In this post, I am going to introduce you to the conventional ways people have battled the financial impact of inflation on their living expenses, investment portfolios and incomes.
What is Inflation?
Inflation is defined as the decline of your purchasing power over time. The rise in the general level of prices, often expressed as a percentage, means that your dollar buys less than it did in prior periods. In reality, the result of inflation is an increase in the cost of goods and services. To deal with the negative impact of inflation it comes down to whether your income increases at the same rate as inflation does so that you can at least remain level with the changes in prices.
For example, we have seen the cost of used cars in 2021 increase over 20% compared to 2020. Most of our incomes have not increased by 20% to offset this cost. Inflation eats away at your cash budget and your lifestyle because over time you will need to pay more for what you need.
The Six Actions Can You Take to Protect Yourself
Here are six actions that can be taken to offset the ravages of inflation on America’s pocketbook:
1. Improve Purchasing Decisions
With persistent inflation, delaying a purchase can be costly since the price is likely to rise in the future. For example, if you wait a year to buy the washer and dryer you need, they may increase 10% in price. You then may decide to make the purchase today to save money. The same can be said if you want to stock up on groceries when you see sales in the stores. Making better purchasing decisions can save households money and help maintain lifestyles despite increasing prices. A caution is that consumers may unwisely decide to dip into their emergency funds to make these purchases to save money.
2. Be a More Intelligent Shopper
When I was a young adult the high inflation rates of the 1970s led to the birth of store brands or generic groceries. These were products that saved consumers money by forgoing heavily advertised brands or unneeded packaging. Today, one-way consumers can be better shoppers is by purchasing generic drugs and store brand goods. Looking for used merchandise versus new with one of the newly created apps is another savings tip. During inflationary times you need to become a more intelligent shopper by looking for different ways to save money.
Another related action is to negotiate for better pricing on everyday purchases whenever you can. There is nothing wrong with asking for a better price — you get what you can negotiate.
3. Take Advantage of Low Interest Rates
There is still a consumer reluctance to lock in the low interest rates while they still can. While The Fed will likely begin to raise interest rates in 2022, consumers should lock in low fixed interest rates on debts. If inflation increases substantially, rates are likely to go higher. Inflation theoretically makes paying fixed-rate debt easier, since you’re paying back the loan with cheaper dollars.
4. Invest in Asset Classes that Are Inflation Hedges
Conventional wisdom is that stocks, real estate, floating rate notes, commodities and US Treasury inflation-protected securities provide hedges against inflation. Despite the concerns people have about riskier asset classes, owning assets like these can be a very good way to combat inflation. For example, the case for owning stocks is that corporations will sell their goods at increasing prices, which will lead to higher revenues, earnings and inevitably, stock prices. Some of the best stocks to own during inflationary times would be companies that can increase their prices naturally during inflationary times. Companies that produce commodities like oil, natural gas and metals normally enjoy pricing power during periods of inflation.
5. Purchase an Annuity to Pay Essential Living Expenses
Another way to hedge against inflation for older adults is to take a portion of their investment portfolio and use it to purchase an annuity that covers their essential living expenses and then becoming more aggressive investing the remainder of their portfolio to offset inflation. By taking care of the essential expenses the individual has the freedom to take more investment risk.
6. Invest in Work Related Skills
By far the best investment individuals can make to be prepared for an inflationary future is an investment in employable skills. For most individuals their ability to earn an income is their greatest asset — their future earning power. This investment begins with quality education and continues with keeping skills up-to-date and learning new skills that will match those that make them the most employable now and into the immediate future. Being able to stay on top of a business's changing needs may not only help to inflation-proof salary, but also recession-proof people’s careers.
Summary
Inflation has been called the silent tax as it takes cash away from consumers each day without a new law being enacted. There are a number of actions that can be taken to offset the effects of inflation on lifestyle, investments and spending habits. You’ll need to develop a whole new set of skills and behaviors to fight inflation.
Ready to improve the quality of your financial life? Harry is the host of a new podcast from the FinancialVerse where he shares practical ways to relieve money stress and anxiety. Each 7 to 10-minute episode is designed to fit into your busy lifestyle. Subscribe today or just ask Alexa or Siri to play the FinancialVerse podcast.