5 Tips for Your Personal Battle with Inflation

[J.J. Montanaro USAA]

Inflation has been on fire over the past year. The war in Ukraine and its impact on oil and the global economy has fanned the flames. Pressures caused by government spending and easy money policies designed to help us emerge from the pandemic have contributed.  So, it was no surprise when the Bureau of Economic Analysis tracked inflation at 8.5% at the end of March. Wow.

Will this be a lasting trend? Hard to tell.

For 30-plus years, inflation has been tame. However, tame does not mean toothless. Spend a bit of time with the Bureau of Labor Statistics CPI Inflation Calculator and you’ll get the picture. Rising prices or inflation have eroded about 50% of the purchasing power of the dollar over the past 30 years. And that’s happened during a period of relatively light inflation.

Here are some key considerations as you look to inflation-proof your own finances: 

• Understand your personal inflation rate vs. the CPI. Inflation is typically measured by what’s known as the Consumer Price Index, or CPI. CPI measures the average change over time in the prices we, as consumers, pay for goods and services. However, it doesn’t reflect your unique personal experience. Your personal inflation rate reflects how rising prices impact you, given how and where you spend. As a starting point for your inflation-proofing efforts, consider using an online calculator to determine your personal inflation rate.
  
  
• Incorporate inflation-friendly investments in your portfolio. Consider the following options:
  
  
  • Stocks. Outpacing inflation has long been reason to invest in stocks of all types. During inflationary environments, food, health care, energy and building materials stocks have typically fared well. Of course, broad-based indices likely make this approach easier; a less expensive and more manageable approach.
    
    
  • Treasury inflation-protected securities. TIPS are issued by the U.S. government and are designed to keep pace with inflation. In practice, the price of these bonds increases with inflation, so they don’t lose purchasing power. Learn more at treasurydirect.gov.
    
    
  • I-Bonds. Series I Savings Bonds come with a return based on a combination of a fixed rate that stays the same for the 30-year life of the bond and an inflation rate that is reset twice a year. In October, the inflation component of the return provided an annualized rate of 7.12%. Unfortunately, there’s a maximum purchase of $10,000 per year, but they can be a solid solution to address inflation within your portfolio.  
    
    
  • Commodities and real estate investments. As prices rise, it would make sense that you could see increased prices across all sorts of raw materials, precious metals, real estate, and yes, oil.  
    
    
  • Beware of the bond teeter-totter. The fact that bond values decline as interest rates rise could make longer-term, fixed-rate bond investments particularly vulnerable unless you plan to hold the bonds until maturity. On the other hand, fluctuating or adjustable-rate, fixed-income investments may fare relatively better.
    
    
• Plan for higher interest rates. Historically, higher interest rates come with higher inflation. You might remember those double-digit interest rate CDs back in the ‘80s? Consider locking in historically low mortgage rates by refinancing and focus on eliminating variable-rate debts like credit cards from your balance sheet in case rates skyrocket.
  
  
• Monitor short-term cash equivalents. It doesn’t seem that long ago that the disparity between money market funds and traditional savings accounts was huge. That could happen again if inflation persists and rates rise. Keep your eye on what’s happening so you don’t get caught with cash equivalents not working as hard as they could be.
  
  
• Don’t quit working too soon. This may not be a welcome message, but it should be a consideration. Wage levels are influenced by inflation. If your income increases with inflation, then continuing to work can help you combat rising prices.

I don’t have a crystal ball, but I do think we all need to have a flexible game plan, and that includes sharpening your inflation-fighting tools.

About the Blogger: JJ Montanaro is a Certified Financial Planner® professional and part of the Military Affairs team at USAA. He’s a graduate of the U.S. Military Academy and has over 20 years of financial planning experience. 

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