How to Fight Inflation

Inflation came in at a four-decade high (February 1982) in January, according to the Consumer Price Index (CPI ). The 7.5 percent annual gain was stronger than expected, as was the core CPI, which jumped by 6 percent, the biggest increase since August 1982.

The report underscores the need for the Federal Reserve to increase short term interest rates. At the next Fed policy meeting next month, the central bank is expected to rate rates by a quarter of a percentage point, the first of what is likely to be a series of hikes, which would increase the fed funds rate by 1.25 points over the course of the year.

Although the Fed has raised interest rates several times over the past two decades, this will be the first time the Fed has had to chase inflation since the 1980s; and according to Diane Swonk, Chief Economist at Grant Thornton, “it will be painful, financial markets are particularly vulnerable to a correction as they attempt to wean themselves from ultra-low rates.”

Given that the post-COVID inflation spike will persist, it’s time to dust off some inflation-fighting strategies that consumers used four decades ago.

Delay Spending: Whether it’s a new device, a much-desired wardrobe addition, a home renovation, or a family trip, delaying a purchase is the easiest way to avoid being slammed with higher prices. This is especially true when it comes to vehicles. If possible, wait to buy a car if you can do so. If you have a lease that’s coming up, consider buying it out instead of extending it. Most lease contracts detail a pre-calculated price, which in the scarcity era of cars, might be a better deal than anything else you could find, if you can even find one!

Be Flexible: As inflation soared in the 1970’s, manufacturers introduced the concept of generic alternatives to brand names, to reduce prices. In the early 1980’s generic sales made up 2.4 percent of all grocery sales,?according to Selling Areas Marketing Inc . Today, generics and private labels account for 19.5 percent of all units sold in 2020, according to?the?Private Label Manufacturers Association . If your favorite brand is not available or a bit too pricey, it’s time to consider a generic brand.

Help the Planet (and your bottom line): Sticker shock at the gas pump and with utility bills might prompt you to reduce driving (or go electric), better manage your thermostat, and seal up those inefficient windows and doorways. Yes, the little things add up to a lot.

Boost Your Income: Workers have more power today than they have in two decades. That means it’s time to ask the boss for more money, either in the form of a raise or perhaps a one-time bonus. If you don't want to leave, consider a side hustle

Prepare for Higher Interest Rates: The Federal Reserve has told us it will increase short term rates, probably at the next meeting in March. That means you should try to lock in fixed rate mortgages now. Don’t worry if you missed the rock-bottom levels of the cycle, borrowing for the long term is still historically cheap. If you are refinancing, you may want to fold in home equity loans or credit card debts that are tied to variable, short-term interest rates.

Diversify Your Portfolio: The goal of every long-term investor is to grow your nest egg at a quicker pace than the rate of inflation, while keeping focused on the total risk level you are willing to assume. When inflation arrives, a diversified portfolio can help shield you from the corrosive nature of rising prices. Consider these asset classes for inclusion in your account.

• Commodities: When inflation rises, the price of commodities like gold and energy increase. However, this is a volatile asset class that flatlines over long stretches of time. Try to limit commodity exposure to 3-6 percent of the total portfolio value.
• Real Estate Investment Trusts (“REITs”): The ultimate “real asset”, REITs tend to perform well during inflationary periods, due to rising property values and rents.
• Stocks: Long-term data show that stocks, especially dividend-producing ones, tend to perform well in inflationary periods.
• Treasury Inflation Protected Securities: To help the investor dilemma of inflation eating into a bond’s fixed-income return, the U.S. government introduced inflation-indexed bonds (TIPS ) in 1997, which are linked to the consumer price index.
• I-Bonds: Issued through the?U.S. Treasury , these savings vehicles provide an annual interest rate, which is derived from a fixed rate and a semiannual inflation rate. For bonds issued November 2021-April 2022, the total is a whopping 7.12 percent. There are a few caveats to consider the purchase of I Bonds:
• *Maximum Purchase per calendar year: $10,000 electronic I-bonds, $5,000 paper bonds
• *Minimum term of ownership: 1 year
• *Interest-earning period: 30 years or until you cash them, whichever comes first
• *Early redemption penalties: Before 5 years, forfeit interest from the previous 3 months